What Does Less Cafe 125 Mean on Your W2?

Many, like ADP, are capable of integrating payroll and benefits to ensure that cafeteria plan contributions and taxes are calculated accurately each pay period. There are many ways employers can provide benefits to employees and not all require a Section 125 Cafeteria Plan. Most states follow the federal tax rules and allow pre-tax deductions for these contributions. Cafe 125 deductions directly reduce your take-home pay because they are taken from your salary before taxes.

Checking Account vs Debit Card

Beyond federal taxes, Section 125 plans can also lead to savings on state and local income taxes, although rules and tax treatment vary by jurisdiction. Many states conform to federal tax law, but some have different regulations. The lower taxable income resulting from Section 125 deductions may also affect eligibility for certain tax credits or deductions, as many are tied to Adjusted Gross Income (AGI). Reducing your AGI could qualify you for, or increase, certain tax benefits.

Since employees’ wages contributed to obtain qualified benefits aren’t subject to income taxes, both the employee and the employer save on payroll taxes. Employees enrolled in a section 125 plan can set aside insurance premiums and other funds pretax, which can then be used on certain qualified medical and child care expenses. Premium Only Plan A POP allows you and your employees to pay insurance premiums with pre-tax dollars.

This plan allows employees to choose between receiving cash (taxable income) or qualified benefits paid with pre-tax dollars. The “cafeteria” analogy comes from the ability to select from a menu of available benefits. Calculate how much you can save when your employees contribute money toward an FSA. In combination with group health insurance, a Premium Only Plan pays a portion of employee-paid insurance premiums on a pre-tax basis.

• HR and benefits start at $9 per month per employee, plus a $40 monthly service fee.
• Section 125 plans are exclusively employer-sponsored, providing valuable benefits and payroll tax savings.
• Under Cafe 125, adoption benefits provided by employers are exempt from federal income tax withholding.
• Generally, traditional Section 125 cafeteria plans are designed for employers to offer to their employees.
• The “cafeteria” analogy comes from the ability to select from a menu of available benefits.
• At eastphoenixau.com, we have collected a variety of information about restaurants, cafes, eateries, catering, etc.

What Is “Cafe 125” on a W-2 Tax Form? – TurboTax

If the FSA is the only benefit provided, it can also be used to reimburse employees for money they spend on health insurance premiums. 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. Employees elect to participate, choosing which benefits to fund with pre-tax deductions from their gross pay. Funds allocated to these benefits are not considered wages for federal income tax purposes.

Frequently asked questions about section 125 plans

This arrangement benefits both employees and employers by reducing tax liabilities for both parties. To set up a section 125 benefits plan, employers have to draft a document that outlines the benefits offered, contribution limits, participation rules and other information required by the IRS. They may also have to perform non-discrimination tests, depending on the plan, to ensure that it doesn’t favor highly compensated or key employees.

By reducing the amount reported in Box 1 of the W-2, these plans lower federal income tax liability. Since less income is subject to federal tax, you pay less each pay period, effectively increasing your take-home pay. This pre-tax treatment is a financial advantage that helps manage essential benefit costs. Because you have reduced payroll taxes, your cost to set up the plan is offset. These taxes and compliance elements can be taken care of via payroll software if you feel able to manage the benefits offerings yourself. An FSA allows an employee to pay for certain medical expenses on a pretax basis.

What Is “Cafe 125” On A W-2 Tax Form? – Dumb Little Man

Without a Section 125 plan, these benefit contributions would be considered part of an employee’s taxable wages for all tax purposes. The phrase “less Cafe 125” or similar notations on your W-2 signifies that these pre-tax deductions have already been factored into the reported wage amounts. Income allotted to cafeteria plans is taken directly from an employee’s paycheck before taxes are taken out.

Can My Employer Change the Terms of the Section 125 Plan?

Any plan that qualifies under IRC section 125 and gives employees the option to choose from at least adp less other cafe 125 one taxable benefit and one qualified benefit may be considered a cafeteria plan. POP, or premium only plans, meet this criteria, which means they are a type of cafeteria plan – one that allows employees to pay only their share of insurance premiums via pretax payroll deductions. The W-2 form, officially known as the Wage and Tax Statement, summarizes your earnings and taxes withheld from your income during the year. Various boxes on the W-2 detail different aspects of your compensation, including taxable wages, federal income tax withheld, and Social Security and Medicare taxes. Line 14, in particular, is often used to report deductions, including those related to Section 125 plans. The “Less Other Cafe 125” entry represents a reduction in your taxable income due to your pre-tax contributions.

This may happen, for instance, if she stopped her medical coverage, but you did not stop her deductions in the payroll system. Salary reduction arrangements allow employees to allocate a portion of their salary toward specific benefits on a pre-tax basis, lowering taxable income. These contributions can fund benefits such as health insurance premiums and flexible spending accounts (FSAs). The pre-tax nature of these contributions reduces federal income taxes, Social Security, and Medicare taxes. Having Cafe 125 reported on your W-2 does not change the way you prepare and file your tax return.

• The name “cafeteria plan” comes from the concept that employees can select from a menu of benefits, much like choosing items in a cafeteria.
• Combined with the other tax savings, the section 125 plan usually funds itself, as the cost to open the plan is low.
• This may sound like it has something to do with where you go on your lunch break, but there is a more reasonable explanation.
• Contributions to cafeteria plans are withheld on a pretax basis, thereby lowering taxable income, which means employees pay less in federal income tax and Medicare and Social Security taxes.
• Once a plan is created, the benefits are available to employees, their spouses and dependents.

What kind of benefits are included in Cafe 125 deductions?

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.