Section 125 Wages

This doesn t apply to section 125 contributions.

Section 125 wages. Section 125 is the section of the irs tax code where the items that can be deducted from employee pay on a pre tax basis are defined. The employee can take the money and buy the insurance they need or they can keep the money as part of their paycheck. With pre tax benefits you deduct the employee s contribution before you withhold taxes reducing their taxable income.

What is a section 125 plan. Employees their spouses and dependents can all benefit from section 125 plans. In the context of section 125 pre tax means that a deduction is exempt from federal income tax withholding social security and medicare taxes.

It is also known as a cafeteria plan. Compensation doesn t include amounts deferred under a section 125 cafeteria plan. 1 its name derives from title 26 section 125 of the united states tax code which establishes the rules employers must follow when operating a cafeteria plan.

A section 125 or cafeteria plan meets the criteria of section 125 of the internal revenue code. Section 125 is a written plan that lets employees choose between qualifying benefits and cash. If your employer provides section 125 plan benefits you receive a tax break on your contributions.

Sec 125 is your employer s benefit plan. In a section 125 plan or cafeteria plan employees can pay qualified medical dental or dependent care expenses on a pretax basis which has the effect of reducing their taxable income as well as their employer s social security fica liability federal income and unemployment taxes and state unemployment taxes where applicable. They are not taxed and are not included in your w 2 box 1 wages so you can not deduct them as medical expenses.

The employer also saves because a section 125 deduction also reduces the employer s portion of the social security and medicare tax liability. The taxable wages boxes on your annual w 2 form show only your wages from which taxes were deducted. Employees receive benefits as pre tax deductions.