What Does Box 14 S125 Mean on Your W-2?

Understanding the various entries on your W-2 form can be daunting, yet it is crucial for accurate tax reporting. Among these entries, Box 14 often includes codes that may seem cryptic to many taxpayers. One such code is “S125,” which frequently appears in this section.

Meaning of Box 14 “S125”

Box 14 on the W-2 form is used for informational entries that don’t fit into other standard boxes. The “S125” code refers to Section 125 of the Internal Revenue Code, which governs cafeteria plans. These plans allow employees to select pre-tax benefit options, reducing their taxable income. The “S125” entry indicates amounts related to these pre-tax benefits.

Section 125 plans enable employees to allocate a portion of their salary toward eligible expenses like health insurance premiums or flexible spending accounts (FSAs) before taxes are applied. These contributions lower gross income, thereby reducing taxable wages and overall tax liability. Employers report these amounts in Box 14 to inform employees of the deductions from their wages for these benefits. While the “S125” code itself does not directly alter tax calculations, it serves as a reminder to factor in these pre-tax contributions during tax and financial planning.

Impact on Taxable Wages

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. This adjustment can lead to significant tax savings, especially for employees making substantial contributions.

For example, if an employee allocates $2,500 annually to a healthcare FSA, that amount is deducted from their gross income, decreasing their taxable income. This reduction may lower their overall tax liability and, in some cases, their tax bracket. Contributions to these plans also reduce wages subject to Social Security and Medicare taxes, providing additional savings. Employees should stay informed about annual IRS limits, such as the $3,050 maximum for healthcare FSAs and the $5,000 limit for dependent care FSAs in 2024, to maximize tax benefits and avoid penalties for excess contributions.

Common Plans Under “S125”

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.

Healthcare FSA

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. For 2024, the maximum contribution limit is $3,050. These contributions reduce taxable income, resulting in tax savings. However, employees should be mindful of the “use-it-or-lose-it” rule, which generally requires funds to be used within the plan year unless the plan permits a grace period or carryover of up to $610. Understanding these provisions helps employees fully utilize their healthcare FSA benefits while avoiding forfeitures.

Dependent Care

Dependent Care FSAs allow employees to allocate pre-tax dollars toward dependent care expenses, such as daycare or after-school programs for children under 13 or care for a dependent incapable of self-care. 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. 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.

Premium Conversion

Premium Conversion Plans, also known as Premium Only Plans (POP), allow employees to pay their portion of health insurance premiums with pre-tax dollars. 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.

Differences From Other Box 14 Entries

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.

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. However, exceeding the annual limit could result in taxable income. Understanding the differences among these entries helps employees accurately interpret their W-2 forms and ensure proper tax reporting.