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. 1Internal Revenue Service. Publication 15-B (2025), Employer’s Tax Guide to Fringe Benefits 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 $3,300 maximum for health FSAs for plan years beginning in 2025 and the $660 carryover cap tied to 2025 amounts for plans that permit carryover, to maximize tax benefits and avoid forfeitures. 2Internal Revenue Service. Healthcare FSA Reminder: Employees Can Contribute Up to $3,300 in 2025
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 2025, the maximum contribution limit is $3,300, and plans that permit a carryover may allow up to $660 tied to 2025 amounts to roll to the next year; specific availability depends on the employer’s plan design. 3Internal Revenue Service. Healthcare FSA Reminder: Employees Can Contribute Up to $3,300 in 2025 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. 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 exclusion limit for employer-provided dependent care assistance is generally $5,000 per year ($2,500 if married filing separately). 4Internal Revenue Service. Child and Dependent Care Credit & Flexible Benefit Plans (FAQ) 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. Employers may use Box 14 to provide other information for employees—examples include union dues, uniform payments, health insurance premiums deducted, nontaxable income, educational assistance payments, and certain state disability insurance taxes. 5Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2025)
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. 6Internal Revenue Service. Publication 970 (2024), Tax Benefits for Education — Employer-Provided Educational Assistance 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.