It provides details of the employee’s gross pay, taxes withheld, and current W-4 profile. It includes boxes and fields with information typically found on a W-2 form such as wages, social security and medicare wages, federal taxes withheld and the employer’s name and ID number. Participation in a Section 125 plan offers significant tax benefits to employees.
About the Section 125 or (Cafeteria) Plan – Investopedia
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.
- Many states conform to federal tax law, but some have different regulations.
- The following TurboTax Online offers may be available for tax year 2024.
- A cafeteria plan is a plan named for Section 125 of the Internal Revenue Code and allows an employee to elect a non-taxable benefit (e.g., medical coverage) in lieu of a taxable benefit (compensation).
- If you choose to opt out, your wages will be fully taxable without the benefit of pre-tax deductions.
With a Section 125 Cafeteria Plan, however, the employer may choose in this situation to offer the cost of the benefits as cash. The employee may use the money towards another benefit; though, if the employee receives cash, that money is taxed. A Section 125 Cafeteria Plan is an employer-sponsored benefits plan that lets employees pay for certain qualified medical expenses – such as health insurance premiums – on a pre-tax basis. On Aug. 6, 2007, the IRS issued proposed regulations governing Section 125 plans Ñ aka cafeteria plans Ñ reflecting several changes occurring since 1997, as well as incorporating new guidance.
Less Other Cafe 125 English to Polish Law: Taxation & Customs
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. On the employer side, section 125 plans offer lots of tax-saving benefits.
In addition, all adoption assistance benefits are also subject to payroll taxes. 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. The term “Cafe 125” is short for “cafeteria plan,” and the tax code section that authorizes the favorable tax terms.
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The primary purpose is to enable employees to pay for specific benefits with pre-tax dollars, reducing their taxable income. This provides a selection of benefits, similar to how one might choose items from a cafeteria. On average, employees can save 30% in combined federal, state and local taxes on a variety of items that they typically already purchase with out-of-pocket post-tax funds. IRC 125 establishes the legal foundation for cafeteria plans, ensuring compliance with federal tax regulations. It allows employees to select benefits like health insurance and retirement contributions while offering a choice between cash and qualified benefits. The plans must be in writing, clearly outlining benefits, eligibility criteria, and election procedures to ensure transparency and accountability.
- The data in Box 12 is for informational purposes only, so employees know the cost of their health coverage.
- Employers who offer a POP are not required to offer employees any other form of cash, including cash in lieu of benefits, so employees who opt out of coverage receive no benefit, taxable or nontaxable.
- For example, your employer must report the cost of major medical, but your contributions to a health flexible spending account aren’t reportable.
- Gross wages represent an employee’s total earnings before any deductions, including regular pay, bonuses, and other compensation.
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Cafeteria, or Section 125 plans include employer-sponsored benefits that are exempt from federal and typically, state taxes. Your employees pay for these benefits with pre-tax money, which you don’t include in their taxable wages on their annual W-2s. These pre-tax deductions are typically reflected in Box 1 (“Wages, tips, other compensation”) of your annual W-2 form. The amount reported in Box 1 is already net of these pre-tax deductions, which is why it often appears lower than your total gross earnings for the year. While these deductions reduce federal income tax and FICA taxes, their treatment for state income tax purposes can vary.
Are There Any Downsides to a Section 125 Plan?
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.
All features, services, support, prices, offers, terms and conditions are subject to change without notice. 🚀 The Policy Shop makes it easy to set up and manage a Section 125 plan that fits your business’s needs. Contact a tax specialist today to explore how to reduce, resolve, or eliminate your back taxes with the IRS Fresh Start Program.
If an employee accidentally contributes over this limit, the plan retains its status if certain conditions are met, like uniform application of terms and correction of excess contributions. I’m actually in a similar boat right now – just got my first “real job” W-2 and was completely baffled by all these abbreviations and codes. I spent way too much time trying to match up my paystub line items with my W-2 before I realized they don’t always use the same terminology.
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