What Does ‘Less Other Cafe 125’ Mean on a W-2?
Decode 'Less Other Cafe 125' on your W-2. Grasp how pre-tax benefit choices influence your reported earnings.
Understanding your W-2 form can feel complex, with various boxes and labels that are not immediately clear. The phrase “less other Cafe 125” is often puzzling for many. This article aims to clarify its meaning and implications for your taxable income.
Understanding W-2 Box 1 and Gross Wages
Gross wages represent an employee’s total earnings before any deductions, including regular pay, bonuses, and other compensation. Box 1 of your W-2 reports “Wages, tips, other compensation,” which is the amount considered taxable for federal income tax purposes.
The figure in Box 1 is often lower than your gross pay. This difference occurs because certain pre-tax deductions are subtracted from your total earnings before the Box 1 amount is calculated. Box 1 reflects your taxable wages, the income on which your federal income tax liability is based.
What is a Section 125 Cafeteria Plan?
A Section 125 Cafeteria Plan is an employer-sponsored benefit program named after Internal Revenue Code Section 125. 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.
Contributions to a Section 125 plan reduce an employee’s taxable income, providing a tax advantage. Common benefits include health, dental, and vision insurance premiums, and contributions to Flexible Spending Accounts (FSAs) for healthcare or dependent care. Other benefits may include group-term life insurance, accident and disability coverage, and adoption assistance. These pre-tax contributions are deducted from an employee’s paycheck before taxes are calculated, lowering reported taxable wages.
Decoding “Less Other Cafe 125”
The phrase “less other Cafe 125” on your W-2 indicates that the amount in Box 1, your federal taxable wages, has been reduced by contributions made to a Section 125 Cafeteria Plan. This notation summarizes the pre-tax deductions subtracted from your gross wages before federal income tax calculation. The word “less” signifies these amounts have already been removed from your income for tax purposes.
The term “other” refers to various qualified benefits under the Section 125 plan, such as health insurance premiums or Flexible Spending Account contributions. Even if you do not recall explicitly enrolling in a “cafeteria plan,” you likely participated in benefits, like health insurance, classified under Section 125. These deductions often appear on pay stubs under specific benefit names, such as “Health Insurance,” rather than “Cafe 125.”
Impact on Taxable Income
“Less other Cafe 125” deductions reduce your federal taxable income reported in Box 1. This decrease in taxable wages means you will owe less in federal income tax. By allocating pre-tax dollars to qualified benefits, employees effectively lower the portion of their income subject to federal income tax.
While Section 125 plan deductions reduce federal income tax wages, they do not reduce wages subject to Social Security and Medicare taxes (FICA taxes). Boxes 3 (Social Security wages) and 5 (Medicare wages and tips) on your W-2 reflect wages still subject to these payroll taxes, which is why their amounts can differ from Box 1. Employers also benefit from these plans through reduced payroll tax liabilities, including FICA and federal unemployment taxes.