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. Employees are free to pick and choose which of these benefits they prefer, and the term “Cafe 125” refers to the Internal Revenue Service's identification code 125 for these kinds of cafeteria plans.
The main benefit of one of these employer-sponsored cafeteria plans is that it allows employees more control over which benefits will be earmarked with their pre-tax earnings on their W-2 tax forms. Some benefits not generally covered by a cafeteria plan include education assistance, meals, transportation and certain types of medical savings accounts. 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. These pre-tax contributions can potentially save employees a great deal of money over the course of each year. When Cafe 125 is reported on an employee's W-2 form, it doesn't change the way the taxes are filed. The funds that has already been deferred to a cafeteria benefits plan should have already been subtracted from the reported wages entered in box 1 on the W-2 form. Before issuing W-2 forms for each of these employees, accounting department personnel are advised to double check that this total amount has been subtracted and entered correctly. Since these benefits are paid for with pre-tax funds, employees are also not eligible to claim any of them as deductions when completing the tax-filing process. Contacting a tax professional is also advised for workers with more detailed questions about their cafeteria plans.