What Does the CAFE Code on a W2 Mean?
Gain clarity on the "CAFE" code on your W2. Understand its connection to your pre-tax benefits and tax reporting.
A W2 form summarizes an individual’s annual earnings and withheld taxes. This document contains various boxes and codes, and Box 14 may include an entry like “CAFE.” Understanding each element on a W2 is important for accurate tax filing. This article clarifies the meaning of “CAFE” on your W2 and its implications.
Locating and Defining “CAFE” on Your W2
When reviewing your W2, you will typically find “CAFE” in Box 14, labeled “Other Information.” This box is designated by employers to report various types of income, deductions, or benefits that do not fit into other specific boxes on the form. The information in Box 14 is often for informational purposes, though some entries may have tax implications.
The “CAFE” entry in Box 14 indicates your participation in a “Cafeteria Plan.” This refers to an employee benefits program where certain deductions for benefits were taken from your pay on a pre-tax basis, meaning before taxes were calculated and withheld from your wages.
Understanding Cafeteria Plans
A Cafeteria Plan, formally recognized by the IRS as a Section 125 Plan, is an employer-sponsored benefit arrangement. These plans allow employees to pay for certain qualified benefits using pre-tax dollars, effectively reducing their taxable income. This framework is established under Internal Revenue Code Section 125.
Common benefits offered through a Cafeteria Plan include health insurance premiums (medical, dental, and vision), Flexible Spending Accounts (FSAs) for healthcare or dependent care expenses, and other qualified benefits like group-term life insurance or adoption assistance. Employers design these plans to offer a choice between at least one taxable benefit, such as cash, and one qualified non-taxable benefit.
Tax Treatment of Cafeteria Plan Contributions
Contributions made through a Cafeteria Plan have a direct impact on your taxable income because they are deducted from your gross earnings before taxes are calculated. This pre-tax treatment means the amount of your wages reported in Box 1 of your W2, which represents your federal taxable wages, is already reduced by these contributions. As a result, you pay less in federal income tax.
Beyond federal income tax, these pre-tax contributions also typically reduce your state income tax liability, if applicable, and your Social Security and Medicare (FICA) taxes. The reduction in FICA taxes occurs because contributions are excluded from wages subject to Social Security and Medicare taxes. This tax reduction is a significant advantage of participating in a Cafeteria Plan, as it increases your spendable income by lowering your overall tax burden.