While the “S125” code itself does not directly alter tax calculations, it serves as a reminder to factor in these pre-tax contributions during tax and financial planning. These cafeteria plans allow employees to set aside pre-tax income for certain employer-offered benefits. Benefits provided by plans covered under section 125 include adoption and dependent care assistance, health insurance, 401k and group term life insurance policies. They are called cafeteria plans because employees are given a list of benefits to choose from, similar to a cafeteria-style menu. Premium Conversion Plans, also known as Premium Only Plans (POP), allow employees to pay their portion of health insurance premiums with pre-tax dollars.
The term “Cafe 125” is short for “cafeteria plan,” and the tax code section that authorizes the favorable tax terms. Under Cafe 125, adoption benefits provided by employers are exempt from federal income tax withholding. However, these benefits, except the forfeited ones from a cafeteria plan, are still subject to social security, Medicare and railroad retirement taxes.
It’s also important to consider how using a Dependent Care FSA affects eligibility for the Child and Dependent Care Tax Credit, as contributions to the FSA may reduce the available credit. Section 125 plans offer various pre-tax benefit options, allowing employees to customize their compensation packages while reducing taxable income. Below are some of the most common plans included under the “S125” designation. Take note of these options because it influences both your take-home pay and the taxes you owe. Hence, making informed choices about these benefits can significantly impact your financial well-being. If there’s an error with the Cafe 125 deductions on your W-2, it can lead to discrepancies in your tax return.
Unlock tailored help options in your account.
It’s crucial you understand taxable versus non-taxable benefits within “Cafe 125” on a W-2. Taxable benefits are like the money you receive as part of your salary, subject to income tax. However, non-taxable benefits are perks your employer provides that aren’t subject to income tax.
Contributions to these plans also reduce wages subject to Social Security and Medicare taxes, providing additional savings. The “S125” entry in Box 14 reflects contributions that reduce an employee’s taxable wages. Participating in cafeteria plans allows employees to lower their gross income by the amount contributed toward pre-tax benefits, which reduces the income subject to federal taxes.
TaxCaster Tax Calculator
However, the long-term tax savings from participating in the plan often outweigh this potential short-term impact on unemployment benefits. While Cafeteria 125 plans are beneficial for most employees, there are some situations where participation might not be advantageous. For example, if you’re in a very low tax bracket, the tax savings might be minimal compared to the flexibility of after-tax dollars. Always consider your financial situation when making these decisions.
Benefits Available Under Cafeteria Plans
- For instance, if an employee pays $200 monthly in health insurance premiums, their annual taxable income is reduced by $2,400.
- The IRS sets annual limits on these contributions, and exceeding these limits can result in tax consequences.
- This amount includes all eligible benefits you chose to pay for with pre-tax dollars, such as health insurance premiums, FSA contributions, and HSA contributions (if applicable).
- Employees should review their pay stubs and W-2 forms to verify that premium contributions are accurately reflected and understand the resulting tax implications.
However, life insurance premiums of more than $50,000 are subject to Social Security and Medicare taxes. Boxes 1, 3 and 5 w2 other cafe 125 represent your federal, Social Security and Medicare taxable wages, respectively. The premiums paid under a cafeteria plan are not included in these taxable wages if they are not subject to these taxes. “Cafe 125” on a W-2 denotes a Section 125 cafeteria plan where you choose benefits like health insurance or retirement plans.
On the up side, because the cafeteria plan funds are not part of the employee’s salary, the IRS does not consider this money as a wage. The IRS sets an annual contribution limit of $5,000 for single filers or married couples filing jointly and $2,500 for married individuals filing separately. These contributions reduce taxable income, offering significant tax advantages. However, employees must maintain documentation for all expenses, as the IRS requires proof to substantiate claims.
Is Cafe 125 Taxable Income?
For example, “NY SDI” indicates contributions to New York State Disability Insurance, which impacts state tax filings but not federal taxes. Union dues reported in Box 14 typically represent post-tax deductions, meaning they do not reduce taxable income like “S125” contributions. Educational assistance benefits, which can be tax-free up to $5,250 annually under Section 127 of the Internal Revenue Code, may also appear in this box if offered by the employer. Understanding the differences among these entries helps employees accurately interpret their W-2 forms and ensure proper tax reporting. By opting for non-taxable benefits such as health insurance or a flexible spending account, you’re reducing your taxable income.
- You may see an entry labeled “Caf 125” or “Section 125” followed by a dollar amount.
- Having Cafe 125 reported on your W-2 does not change the way you prepare and file your tax return.
- C- Taxable costs of group life insurance over 50,000 included in W2 boxes 1,3( upto Social Security wages base and Box 5.
Zacks may license the Zacks Mutual Fund rating provided herein to third parties, including but not limited to the issuer. Your gross pay was adjusted, it says Gross pay, Less Other Cafe 125, then Reported W2 wages. To understand the amount in box 14, you must know the taxes that don’t apply to your Section 125 deductions. Ask the employer what it is for since the box 14 entries can be almost anything that did not fit in box 12. They are informational only and don’t affect the federal return at all.
When it comes to these benefits, think of yourself as being at a buffet—you have a variety of options laid out for you. These choices extend beyond just a paycheck; it includes health insurance plans, retirement contributions, and even commuter benefits. 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.
Why Are My Taxes So High on My Paycheck?
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. If this isn’t the case, these contributions are subject to taxes and must be reported accordingly on the W-2 form. 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.
Zacks Mobile App
These distinctions help you to make informed decisions about your compensation package. W-2 form is a crucial document your employer provides at the start of the year, summarizing your earnings and taxes withheld throughout the previous year. “Cafe 125” within this form denotes a Section 125 cafeteria plan, offering you a range of benefits as an employee. You do not need to enter information regarding your section 125 (cafeteria plan) for medical expenses anywhere on your tax return. Therefore, there is not an additional deduction that you can take for those amounts.
While Cafeteria 125 contributions reduce your income tax liability, they also slightly reduce your Social Security wages. This means you’re paying less in Social Security taxes, which could have a minor impact on your future Social Security benefits. However, the immediate tax savings for most employees outweigh this small reduction in future benefits. The primary benefit of Cafeteria 125 plans is that they reduce your taxable income. The amount you contribute to these plans is deducted from your gross income before taxes are calculated. This means you’re paying taxes on a lower amount, potentially reducing your overall tax liability.
It’s not just about tax savings, it’s about maximizing your financial well-being. The health Flexible Spending Arrangement (FSA) under Cafe 125 has a contribution cap. Employees can only elect up to $3,050 in salary reduction contributions, excluding any rollover amounts from previous years.