By opting for non-taxable benefits such as health insurance or a flexible spending account, you’re reducing your taxable income. On the flip side, if you choose taxable benefits like additional cash wages, your taxable income increases, potentially leading to a higher tax bill. For example, consider someone with a salary of $60,000 who contributes $4,000 toward health insurance premiums and $1,500 to an FSA. Not only do they benefit from having a lower taxable income, but they also pay less in Social Security and Medicare taxes, further increasing their savings. For example, if your salary is $50,000 and you contribute $3,000 toward your health insurance premiums and $1,500 to a flexible spending account, your taxable income would be reduced to $45,500.
Your selections impact your paycheck deductions, reflecting in your W-2 tax form. Be aware that pre-tax benefits reduce your taxable income, lowering the amount of tax you owe. Make sure you understand the link between your choices and the W-2 as it helps you manage your tax situation efficiently. A Section 125 plan, also known as a “cafeteria plan”, allows employees to convert otherwise taxable items, such as a salary, into nontaxable benefits if they so choose.
- Income allotted to cafeteria plans is taken directly from an employee’s paycheck before taxes are taken out.
- When you see “Cafe 125” on your W-2, it signifies that your employer has a cafeteria plan in place.
- The IRS sets annual limits on these contributions, and exceeding these limits can result in tax consequences.
- If you’ve noticed Cafe 125 on your W-2 tax form, you might be curious about its meaning and how it affects your taxes.
Misunderstanding Mid-Year Changes
Our what is cafe 125 on w2 partners cannot pay us to guarantee favorable reviews of their products or services. We believe everyone should be able to make financial decisions with confidence. One frequent mistake is overestimating contributions to Flexible Spending Accounts (FSAs).
This can help you ensure you’re not over-contributing or under-utilizing your benefits. Many employers offer online portals or regular statements that allow you to monitor your contributions and usage. By staying informed, you can make adjustments if necessary during open enrollment periods or when experiencing qualifying life events. The content on Dumblittleman is for informational and educational purposes only and should not be construed as professional financial advice.
In addition, all adoption assistance benefits are also subject to payroll taxes. Most cafeteria plans are not subject to Medicare taxes, and by allowing employees to defer income to these programs, employers generally pay less in payroll taxes. Cafeteria plans also can build employees’ loyalty within the company by saving them money and offering benefits they could not otherwise afford. When you receive your W-2 form at the end of the year to document your taxable income, you might notice “Cafe 125” with an amount next to it on your form. That designation refers to amounts on which you don’t have to pay income taxes, and potentially payroll taxes, because you chose to receive a specific employee benefit rather than cash.
Who can sponsor a section 125 plan?
For comprehensive tax, legal or financial advice, always contact a qualified professional in your area. S’witty Kiwi assumes no liability for actions taken in reliance upon the information contained herein. Your W-2 reflects these deductions and benefits at the end of the tax year, providing you with a summary of what you’ve earned and the taxes withheld.
You pay for these benefits with pre-tax dollars, potentially saving you a bundle on taxes. For example, education assistance and certain transportation benefits aren’t included. Section 125 of the Internal Revenue Service code gives employers the option to offer employees a plan that allows the employee to pay qualified expenses with pre-tax dollars. The employee can withdraw money from this account to pay the qualified expenses. A Section 125 ‘cafeteria’ plan is so-called because you get to choose your benefits from a menu, like choosing food at a cafeteria.
How does participating in a Cafeteria 125 plan affect my ability to contribute to an IRA?
Unlike Health Savings Accounts (HSAs), FSAs typically have a “use it or lose it” policy, meaning any unused funds are forfeited at the end of the plan year. Be realistic about your expected expenses to avoid losing money due to overcontribution. SOMETIMES Box 14 is used for one of the categories on the drop-down list and it is an additional tax or deduction.
- It’s always a good idea to stay up to date with any IRS announcements related to Section 125 to maximize your tax benefits.
- Boxes 1, 3 and 5 represent your federal, Social Security and Medicare taxable wages, respectively.
- These pre-tax contributions can save the employee hundreds—possibly even thousands—of dollars in income taxes and Social Security and Medicare taxes over the course of a year.
Are there any situations where it might be disadvantageous to participate in a Cafeteria 125 plan?
A cafeteria plan is a cost-effective way for businesses to sponsor benefits packages. It offers tax advantages for employers and employees alike and is a key component of many talent acquisition strategies. Cafeteria 125 contributions can affect unemployment benefits if you lose your job.
Therefore, Cafe 125 deductions lower the amount of taxes you owe without reducing your overall compensation. If you find a discrepancy on Form W-2, you should contact your employer immediately to have it corrected. Also, remember that these benefits are paid for with pre-tax dollars so they are not eligible to be used as a deduction on your return. For example, health insurance is a common benefit offered by these plans, but you cannot also use these costs as a medical deduction on Schedule A if you paid for them through your cafeteria plan.
Box 14 on my w2 shows SEC 125. What is this?
Because these deductions are made pre-tax, they reduce the portion of your wages that are subject to federal income tax, Social Security, and Medicare taxes. By contributing to these plans pre-tax, you reduce the amount of your income subject to federal income tax, Social Security, and Medicare taxes. This means you can benefit from tax savings while securing valuable health and welfare benefits.
Just like charitable donations need to be made to qualified organizations, so do you have limitations within cafeteria plan rules in order to get tax exemptions. As mentioned before, reimbursement for continuing education does not qualify as well as scholarships. In addition, employer-covered meals will not be exempt under the cafeteria plan. If your company reimburses you for lodging while on a work trip, that will not qualify under the cafeteria plan either. But if you select the benefit, your company doesn’t include the benefit as part of your taxable income.
Diane Stevens’ professional experience started in 1970 with a computer programming position. Beginning in 1985, running her own business gave her extensive experience in personal and business finance. Stevens holds a Bachelor of Science in physics from the State University of New York at Albany. This compensation may impact how, where and in what order products appear. These circumstances in and of themselves are not enough to justify a special open enrollment. Employees usually have to provide a marriage license, birth certificate, letter from an insurance company or other documentation to prove their eligibility.
Contacting a tax professional is also advised for workers with more detailed questions about their cafeteria plans. Cafe 125 on a W-2 tax form refers to a cafeteria plan, in which an employer offers workers a choice between various job benefits. These benefits can include medical insurance, life insurance, adoption assistance, assistance with care for dependent elderly relatives, extra paid vacation days and similar. Employees are free to pick and choose which of these benefits they prefer, and the term “Cafe 125” refers to the Internal Revenue Service’s identification code 125 for these kinds of cafeteria plans. These cafeteria plans allow employees to set aside pre-tax income for certain benefits, including dependent care assistance, group term life insurance, and adoption assistance.
It’s not just about tax savings, it’s about maximizing your financial well-being. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media. Your box 1 W2 wages are already reduced by the amount you pay towards health insurance. ECG Pte Ltd () is an independent publisher and comparison service, not an investment or financial advisor. Its articles, interactive tools, and other content are provided to you for free, as self-help tools and for informational purposes only.
