What Is a Cafe 125 Deduction on a Paycheck?

If you see "Cafe 125," "Cafeteria 125," or "Sec 125" on your pay stub, a benefit cost was taken out of your pay before taxes. That is normal, and it is usually good news for your take-home pay. This page explains what the line means, what it covers, and what an employer must do to run it correctly.

What does Cafe 125 mean on a paycheck?

Cafe 125 means the deduction runs through a Section 125 cafeteria plan, a written employer plan allowed under Section 125 of the Internal Revenue Code. The plan lets employees pay for certain benefits with pre-tax pay instead of taking the same money as taxable cash.

Payroll systems label the line in different ways. Common labels include Cafe 125, Cafeteria Plan, Sec 125 Med, S125 Dental, and Pretax Medical. The wording changes, but the idea is the same: the amount came out before tax.

Which benefits show up as a Cafe 125 deduction?

A Cafe 125 deduction can pay for health, dental, and vision premiums, a health FSA, a dependent care FSA, and an HSA when the employer offers one through the plan. The IRS calls these qualified benefits.

The IRS sets a limit on one of them. For plan years beginning in 2026, a health FSA cannot take more than $3,400 in employee salary reductions, according to IRS Publication 15-B (2026). A plan that ignores that cap risks losing its cafeteria plan status.

Some pay items do not belong in this line. Roth 401(k) contributions, after-tax life insurance, and wage garnishments are not Cafe 125 deductions. Check the label before you assume.

How does a Cafe 125 deduction change take-home pay?

A Cafe 125 deduction lowers the wages that federal income tax and FICA are figured on, so you keep more of each paycheck than you would paying the same premium with after-tax money. The IRS says qualified cafeteria plan benefits are generally not subject to FICA or federal income tax withholding (IRS, cafeteria plan FAQs).

Here is a simple example with made-up numbers. An employee earns $4,000 per month and pays a $200 monthly health premium through the plan. The employee is in the 12% federal bracket.

The employer also saves. Employer FICA drops by 7.65% of $200, or $15.30 per month for this one employee. FICA is the 6.2% Social Security tax plus the 1.45% Medicare tax, paid by both the employee and the employer (IRS Tax Topic 751). Social Security tax applies only up to the 2026 wage base of $184,500 (Social Security Administration).

Summit Health Benefits sees this pattern often: the employee gets a tax break on every pay period, and the employer gets a payroll tax cut on the same dollars. Our guide on how Section 125 reduces W-2 wages shows how the lower wages appear at year end.

Does a Cafe 125 deduction show up on my W-2?

Yes, but only as lower wage numbers. Pre-tax premiums are left out of Box 1 (federal wages), Box 3 (Social Security wages), and Box 5 (Medicare wages), so those boxes show less than your total gross pay. Some employers also add a Box 14 note labeled Sec 125 or Cafe 125 that shows the total.

Box 14 is for employer information, and its labels are not standardized. Our guides on what Section 125 on a W-2 means and W-2 Box 14 codes explain each label.

What must an employer do to run Cafe 125 deductions correctly?

An employer must have a written Section 125 plan document, set up the deduction as pre-tax for income tax and FICA in payroll, and collect an election from each employee before the plan year starts. Without a written plan, the deduction does not qualify as pre-tax, and the IRS can treat the benefits as taxable wages.

The most common payroll mistakes are small ones. A deduction coded as pre-tax for income tax but not for FICA, a new hire elected after the first day of work, and a 2% S corporation owner treated like a regular employee all cause errors. IRS Publication 15-B (2026) says a 2% S corporation shareholder is not treated as an employee for cafeteria plan purposes.

Mid-year changes are limited too. Employees generally can change a Cafe 125 election only after a qualifying event such as marriage, birth, or loss of other coverage. Our Section 125 qualifying events guide lists the events that count.

Who sets up and manages a Cafe 125 plan?

Most small and mid-size employers hire a plan administrator because the written plan, elections, and testing take time to get right. Summit Health Benefits is a Section 125 plan administrator. Summit provides the written plan document and summary plan description, supports nondiscrimination testing, and has its documents reviewed by ERISA attorneys.

The cost works in the employer's favor. Summit charges a $35 per enrolled employee per month administration fee, paid out of the FICA savings the plan creates. Employers typically net about $56 to $101 per enrolled employee per month after that fee. Employees typically see $70 to $110 more in monthly take-home pay. Read the full math in our Section 125 plan cost guide or test your own numbers in the savings calculator.

For a closer look at how the whole plan works, see the Section 125 cafeteria plan guide.

Frequently Asked Questions

Sources: IRS, FAQs for Government Entities Regarding Cafeteria Plans (2026); IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits (2026); IRS Tax Topic 751, Social Security and Medicare Withholding Rates (2026); Social Security Administration, Contribution and Benefit Base (2026).