by Laura Diffendal A Healthcare Flexible Spending Account (FSA) enables employees to set aside pre-tax dollars for eligible medical expenses, such as co-pays and prescription medications. These contributions reduce taxable income, resulting in tax savings. Understanding these provisions helps employees fully utilize their healthcare FSA benefits while avoiding forfeitures. 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.
Understanding Section 125 Plans
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.
What Is ‘Cafe 125’ on a W-2 Tax Form?
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.
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.
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.
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.
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How Cafeteria Plans Work
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.
- The deductions are already factored into your taxable income as shown on your W-2 form.
- From what I’ve read this seems redundant, like differents amounts of money referring to the same thing.
- Take note of these options because it influences both your take-home pay and the taxes you owe.
- Zacks Rank stock-rating system returns are computed monthly based on the beginning of the month and end of the month Zacks Rank stock prices plus any dividends received during that particular month.
- An HSA is a savings account that goes along with an HDHP insurance plan.
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.
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.
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.
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 w2 other cafe 125 situation when making these decisions.
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.
On my w2 I have an adjusted gross due to it says other cafe 125 what is this and what do I do
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.
- The taxable wages boxes on your annual W-2 form show only your wages from which taxes were deducted; this doesn’t apply to Section 125 contributions.
- They are called cafeteria plans because employees are given a list of benefits to choose from, similar to a cafeteria-style menu.
- For example, if your gross income is $50,000 and you contribute $3,000 to a Cafeteria 125 plan, your taxable income would be reduced to $47,000.
- This reduction lowers federal income tax liability and decreases Social Security and Medicare taxes.
- It’s important to note that reducing your taxable income through Cafeteria 125 contributions can affect other tax-related items.
Benefit Selection Timing and its Impact on W-2 Form
For example, if your gross income is $50,000 and you contribute $3,000 to a Cafeteria 125 plan, your taxable income would be reduced to $47,000. Box 14 on the W-2 form can include various entries, each with distinct implications. While “S125” reflects pre-tax benefits under cafeteria plans, other entries may pertain to state-specific taxes, union dues, or educational assistance programs. A Cafeteria 125 plan, also known as a Section 125 plan, is a type of employee benefit plan authorized by Section 125 of the Internal Revenue Code. These plans allow employees to pay for certain qualified benefits with pre-tax dollars.
However, life insurance premiums of more than $50,000 are subject to Social Security and Medicare taxes. Boxes 1, 3 and 5 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.
For instance, if an employee pays $200 monthly in health insurance premiums, their annual taxable income is reduced by $2,400. This reduction lowers federal income tax liability and decreases Social Security and Medicare taxes. Employers also benefit by saving on payroll taxes for these contributions. Employees should review their pay stubs and W-2 forms to verify that premium contributions are accurately reflected and understand the resulting tax implications. For instance, your health insurance premiums are free from federal income, Social Security and Medicare taxes.