You’ll choose “Cafe 125” benefits during your initial enrollment period or during designated open enrollment periods, typically held annually by your employer. It’s like a window of opportunity for you to review, adjust, or enroll in various benefit options. One other thing to note about qualifications for tax exemption under the cafeteria plan is the employee status.

The majority of IRS Code 125 cafeteria plans are not subject to Medicare taxation, and many employers find these plans beneficial for both their companies and for their employees. Cafeteria plans allow employers to save money on payroll taxes by allowing employee choices of income deferment. A cafeteria plan can also help to build employee loyalty over time, since it can save workers money as well as give them access to benefits they may not have otherwise been able to afford. Income from a cafeteria plan is taken directly from each employee’s paycheck before taxes are taken out.

Typical Non-Taxable Benefits

Think of it like building your meal at a cafeteria, but instead of food, you’re selecting from a buffet of benefits like health insurance, life insurance and dependent care assistance. 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. The employer benefit options you see in “Cafe 125” on your W-2 Form refer to a buffet of choices your employer offers you. These options aren’t just about your salary but include various benefits like health insurance, retirement plans, and flexible spending accounts (FSAs). This plan allows you, as an employee, to choose between taxable benefits, like cash wages, and non-taxable benefits, such as health insurance, retirement plans, or flexible spending accounts (FSAs).

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• This corrected version will reflect the accurate pre-tax deductions and taxable wages, ensuring your taxes are calculated correctly.
• Get unlimited advice, an expert final review, and your maximum refund, guaranteed with TurboTax Live Assisted Basic.
• 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.
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• These benefits can include medical insurance, life insurance, adoption assistance, assistance with care for dependent elderly relatives, extra paid vacation days and similar.

Other benefits can be offered by your employer but not as part of the Section 125 cafeteria plan. Under a cafeteria, or Section 125, plan, you pay for your employer-sponsored benefits with pretax money. Your employer deducts your payments from your wages before withholding certain taxes. Your employer doesn’t include your pretax payments in your taxable wages on your annual W-2. If there’s an error with the Cafe 125 deductions on your W-2, it can lead to discrepancies in your tax return. For instance, if your health insurance premiums were not properly deducted before taxes, your Box 1 wages would appear higher than they should be, which could result in overpaying taxes.

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• What you will see on your W-2 is a reduction in your gross wages because the cafeteria plan lowered your salary.
• Cafeteria plans also can build employees’ loyalty within the company by saving them money and offering benefits they could not otherwise afford.
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• Your contributions come out of your paycheck before taxes are calculated, leading to significant savings.

It’s not just about tax savings, it’s about maximizing your financial well-being. We help taxpayers understand and access options available through the IRS Fresh Start Program. To correct such errors, you’ll need to contact your employer and request a corrected W-2 form (W-2c). This corrected version will reflect the accurate pre-tax deductions and taxable wages, ensuring your taxes are calculated correctly. When you get your W-2 tax form, you might notice a section labeled “Cafe 125” and wonder what it means.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. For comprehensive tax, legal or financial advice, always contact a qualified professional in your area.

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. 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.

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Before diving into how Cafeteria 125 appears on your W-2, it’s essential to understand what this term means. S’witty Kiwi is an independent, advertising-supported publisher and comparison service. S’witty Kiwi is compensated in exchange for featured placement of sponsored products and services, or your clicking on links posted on this website. Free filing of simple Form 1040 returns only (no schedules except for Earned Income Tax Credit, Child Tax Credit and student loan interest). Get unlimited advice, an expert final review, and your maximum refund, guaranteed with TurboTax Live Assisted Basic.

Our estimates are based on past market performance, and past performance is not a guarantee of future performance. Just like charitable donations need to be made to qualified organizations, cafe 125 on w2 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. Tax laws surrounding Section 125 Cafeteria Plans can change from year to year.

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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. Cafeteria 125 contributions can affect unemployment benefits if you lose your job. Since these contributions reduce your taxable wages, they may also reduce the wage base used to calculate your unemployment benefits, resulting in slightly lower unemployment payments.

Generally, self-employed individuals and independent contractors are not eligible to participate in Cafeteria 125 plans, which are typically only available to employees of companies that offer them. If you’re self-employed or a contractor, consult a tax professional to explore the best options. While Cafeteria 125 contributions reduce your income tax liability, they also slightly reduce your Social Security wages.

Cafe 125 deductions directly reduce your take-home pay because they are taken from your salary before taxes. However, because they are deducted pre-tax, they lower your taxable income, which results in tax savings. Participating in a Cafeteria 125 plan can indirectly affect your ability to contribute to an IRA by lowering your Modified Adjusted Gross Income (MAGI).

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It’s easy to feel confused by these unfamiliar terms, but don’t worry – we’re here to simplify it for you! In this guide, we’ll explain what Cafe 125 is, how it affects your taxable income, and what it means for your tax return. Take the time to evaluate your healthcare needs, anticipated medical expenses, and other benefit requirements. By choosing the right mix of benefits through your Cafeteria 125 plan, you can maximize your tax savings while ensuring appropriate coverage. When selecting, consider factors such as your health status, family size, and financial goals.