The S125 entry in Box 14 of your W-2 is the total amount of your pay your employer redirected, before taxes, into benefits offered through a Section 125 cafeteria plan. That figure has already been subtracted from the taxable wages shown in Box 1, so for federal purposes you typically owe nothing extra and claim no additional deduction. It’s there for your records and, in some states, for state tax purposes.
What the S125 Number Represents
A Section 125 cafeteria plan lets you choose between taking cash wages or paying for certain benefits with pre-tax dollars.1Office of the Law Revision Counsel. 26 USC 125 Cafeteria Plans The most common items funded this way are health insurance premiums deducted from your paycheck, contributions to a health Flexible Spending Account (FSA), and contributions to a Dependent Care FSA used for child care or elder care.
The S125 figure is the combined total of those pre-tax deductions for the year. If you paid $4,800 toward health premiums and put $1,200 into a health FSA, the S125 line would read $6,000. Your employer chose the label; on other W-2s you might see “Sec125,” “Cafe125,” or “Cafeteria.” Box 14 codes are employer-chosen, not standardized by the IRS.2Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026)
Do You Need to Do Anything With It on Your Federal Return?
For most filers, no. The pre-tax treatment already happened through payroll. Box 1 already reflects the lower wage figure, and you do not subtract the S125 amount again anywhere on Form 1040. Doing so would create a double deduction and can trigger an IRS notice.
When you enter your W-2 in tax software, you’ll often see a dropdown for Box 14. Pick “Section 125” or “Cafeteria plan” if it appears, or choose “Other” if it doesn’t. The software treats the entry as informational and won’t flow it to any line on your 1040. If your software doesn’t recognize “S125” as a label, that’s normal.
There is one exception. If your cafeteria plan includes a dependent care FSA, those contributions should also appear in Box 10, and you’ll need to complete Form 2441 to claim the dependent care benefit. The S125 total in Box 14 will be larger than Box 10 if you also had health premiums or a health FSA running through the plan, since S125 captures everything.
How S125 Already Changed Your W-2
The tax break shows up in three different boxes, all of which are lower than your gross pay because of your cafeteria plan elections:
- Box 1 (federal wages) is reduced by the full S125 amount, which lowered your federal income tax withholding.
- Box 3 (Social Security wages) is also reduced, because cafeteria plan contributions are exempt from the 6.2% Social Security tax.
- Box 5 (Medicare wages) is reduced too, saving you the 1.45% Medicare tax and, for high earners, the 0.9% additional Medicare tax.
For someone in the 22% federal bracket who contributed $3,400 to a health FSA, the federal income tax savings alone come to $748. Add Social Security and Medicare and the total tax reduction on that $3,400 is roughly $1,008. The savings scale with your bracket.
States That Tax Section 125 Contributions
A few states don’t follow the federal tax treatment of cafeteria plans. In those states, some or all of your Section 125 contributions get added back to your state taxable income even though they’re excluded federally.
New Jersey is the most prominent example. Its rules treat cafeteria plan contributions as taxable wages to the extent you could have taken cash instead. Pennsylvania similarly requires cafeteria plan contributions to be included in taxable compensation under its personal income tax. If you live or work in one of those states, your state form will instruct you to add the Box 14 S125 amount, or a portion of it, back into your state wage base. You may also notice that Box 16 (state wages) is higher than Box 1 on your W-2 for this reason.
S125 vs. Box 12 Codes
Box 14 and Box 12 both report pre-tax benefits, and it’s easy to mix them up. Box 12 uses IRS-standardized codes; Box 14 uses whatever label your employer picks.
The most common source of confusion is between a health FSA (part of S125 in Box 14) and a Health Savings Account, or HSA, which appears with Code W in Box 12. These are different accounts with different rules. HSA contributions get their own IRS code; FSA contributions don’t, so they land in Box 14. If you see both Code W in Box 12 and S125 in Box 14, you’re participating in two separate accounts. An HSA balance is yours permanently and carries over year to year. A health FSA is subject to a use-it-or-lose-it rule at the end of the plan year, softened only if your employer offers a grace period or a limited carryover.3Internal Revenue Service. Notice 2005-42 Section 125 Cafeteria Plans Modification of Application of Rule Prohibiting Deferred Compensation Under a Cafeteria Plan
Code DD in Box 12 is a separate item still: it’s the total cost of your employer-sponsored health coverage, reported for informational purposes under the Affordable Care Act. Code DD has no impact on your taxes and is not the same as S125.
If the S125 Amount Looks Wrong
If the S125 figure doesn’t match your pay stubs or your own records of what was deducted, contact your employer’s payroll or HR department first. They can review the discrepancy and, if there’s an error, issue a corrected W-2 (Form W-2c). Don’t file a return using numbers you know are wrong. A Box 14 error can also signal mistakes in Box 1, Box 3, or Box 5, and those boxes affect your tax liability directly.
If your employer refuses to correct a clearly wrong W-2, you can contact the IRS at 800-829-1040. The IRS may reach out to the employer on your behalf. In the meantime, file using the figures you believe are correct based on your pay records, and include a brief explanation.
Other Codes You Might See in Box 14
S125 is one of many entries an employer can put in Box 14. Common ones include state disability insurance withholdings (often labeled “SDI” or “CASDI”), union dues, uniform payments, educational assistance, and after-tax retirement contributions.2Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026) Some of these do affect your return. State disability withholdings, for example, may be deductible as state taxes on Schedule A if you itemize. Union dues are not deductible on federal returns under current law, though some states allow the deduction.
If you see a Box 14 label you don’t recognize, ask your employer’s payroll department what it represents before assuming it’s inert. Most entries are informational, but a handful carry reporting obligations your tax software won’t handle automatically.