Section 125 Deduction on Your Paycheck: What It Means and What It Saves

• A Section 125 deduction is excluded from federal income tax and from the 7.65% employee FICA tax (6.2% Social Security plus 1.45% Medicare) under IRC Section 125 and IRS Publication 15-B.
• An Illinois employee paid $2,000 biweekly with $212 in Section 125 deductions keeps $52.14 more per paycheck, or $1,355.64 a year, than with the same deductions taken after tax, using 2026 rates.
• New Jersey does not follow the federal Section 125 exclusion for salary reductions, so New Jersey income tax still applies to the deduction, per New Jersey Division of Taxation Technical Bulletin TB-39(R).
• A Section 125 election generally cannot change mid-year unless the employee has a qualifying event such as marriage, birth, or loss of other coverage, under Treasury Regulation 1.125-4.

A Section 125 deduction on your paycheck is your share of benefit costs, taken out before taxes, which is why your taxable wages are lower than your gross pay. If your stub says SEC 125, S125, CAF 125, or CAFE 125, that line is saving you money, not costing you extra. Last reviewed: September 23, 2026. Reviewed by a licensed benefits professional.

What is a Section 125 deduction on a paycheck?

A Section 125 deduction on a paycheck is an amount an employee chose, during enrollment, to pay toward workplace benefits with pre-tax dollars through the employer's cafeteria plan. The name comes from Section 125 of the Internal Revenue Code, which lets employees pick between taxable cash pay and certain nontaxable benefits without the benefits becoming taxable income. The most common Section 125 deductions pay for medical, dental, and vision premiums, a health flexible spending account (FSA), and a dependent care FSA. Because the deduction comes out before taxes are figured, federal income tax, Social Security tax, and Medicare tax are calculated on a smaller wage number. IRS Publication 15-B lists these cafeteria plan benefits as excluded from wages for income tax withholding and FICA. The Section 125 deduction is not a fee, a fine, or a garnishment. The Section 125 deduction is simply the employee's own benefit cost moved ahead of the tax line, which puts more money in each paycheck.

For the full employer-side rulebook, the Section 125 cafeteria plan guide→ covers plan documents, elections, and nondiscrimination testing.

What do SEC 125, S125, and CAFE 125 mean on a pay stub?

SEC 125, S125, CAF 125, CAFE 125, and PRE-TAX MED are payroll system abbreviations for the same thing: a deduction taken under a Section 125 cafeteria plan. Payroll providers each pick their own short code, so two employers can label the same medical premium differently. Some stubs show one combined Section 125 line. Others break the total into medical, dental, vision, and FSA lines.

What is cafeteria 125?

Cafeteria 125 is a nickname for a Section 125 cafeteria plan, the written employer plan that makes pre-tax benefit deductions legal. The word cafeteria describes the choice: each employee picks from a menu of qualified benefits, and whatever the employee does not pick stays as regular taxable pay. A cafeteria 125 plan must be in writing, must let employees choose between cash and qualified benefits, and must lock elections in before the plan year starts, according to Proposed Treasury Regulation 1.125-1. Qualified benefits include employer health coverage, dental and vision coverage, group-term life insurance up to $50,000, health FSAs, dependent care FSAs, and HSA contributions. Benefits that cannot run through a cafeteria 125 plan include scholarships, most long-term care insurance, and most fringe benefits under Section 132, per IRS Publication 15-B. When an employee sees a cafeteria 125 deduction, the employer has a plan in place and the employee made at least one pre-tax election during enrollment.

What does a Section 125 deduction look like on a pay stub?

A Section 125 deduction appears between gross pay and taxable wages on a pay stub, and every tax line below it is calculated on the smaller number. Take an Illinois employee earning $52,000 a year, paid every two weeks, so gross pay is $2,000.00 per paycheck. The employee elected $150.00 per paycheck for medical coverage, $12.00 for dental, and $50.00 for a health FSA, for $212.00 in Section 125 deductions. Federal taxable wages fall from $2,000.00 to $1,788.00, and Social Security and Medicare wages fall by the same $212.00. For 2026, a single filer's taxable income stays inside the 12% federal bracket, which runs up to $50,400 after the $16,100 standard deduction, per IRS Revenue Procedure 2025-32. Illinois taxes wages at a flat 4.95%, according to the Illinois Department of Revenue. The table below shows only the tax on the $212.00, which is the part the Section 125 plan changes.

How much do Section 125 tax savings add up to in a year?

Section 125 tax savings add up to $1,355.64 a year for the Illinois employee in this example: $52.14 per paycheck times 26 paychecks. That breaks down to $25.44 in federal income tax, $16.21 in Social Security and Medicare tax, and $10.49 in Illinois income tax each pay period. The yearly pre-tax total is $5,512.00, and the $1,300.00 health FSA portion stays well under the 2026 health FSA limit of $3,400, per IRS Revenue Procedure 2025-32.

The employer saves too. The employer's matching 7.65% FICA on the same $212.00 is $16.21 per paycheck, or $421.46 a year for this one employee. Across a whole workforce, that matching FICA savings is why many employers are happy to offer a Section 125 plan.

Which taxes does a Section 125 deduction reduce?

A Section 125 deduction reduces federal income tax, the 6.2% Social Security tax, the 1.45% Medicare tax, and in most states the state income tax. IRS Publication 15-B lists cafeteria plan benefits such as accident and health coverage and dependent care assistance as excluded from income tax withholding, Social Security and Medicare taxes, and federal unemployment tax. That triple exclusion is what separates a Section 125 deduction from a traditional 401(k) deferral, which lowers federal income tax but still pays Social Security and Medicare tax. For most employees, the combined rate saved on each Section 125 dollar is the federal bracket plus 7.65% plus the state rate. In the 12% federal bracket with a 4.95% state tax, that is 24.60 cents saved on every dollar. In the 22% federal bracket, the same employee would save 34.60 cents per dollar. Local wage taxes follow their own rules, so employees in cities with a local income tax should check that line separately.

Why doesn't a Section 125 deduction lower New Jersey state tax?

New Jersey does not adopt the federal treatment of Section 125 salary reductions. The New Jersey Division of Taxation's Technical Bulletin TB-39(R) says premiums and FSA contributions paid through a salary reduction agreement stay in New Jersey taxable wages, under N.J.S.A. 54A:6-24. A New Jersey employee still saves federal income tax and FICA on every Section 125 dollar. On a New Jersey pay stub, state wages will usually be higher than federal wages by the Section 125 total, and that difference is correct.

Does a Section 125 deduction lower Social Security benefits?

A Section 125 deduction can lower future Social Security benefits by a small amount, because the Social Security Administration figures retirement benefits from earnings subject to Social Security tax. In the example above, $5,512.00 a year is removed from Social Security wages. For most workers the tax saved today is larger than the benefit change later, but employees close to retirement can ask the Social Security Administration for a personal estimate.

Is a Section 125 deduction the same as a 401(k) deduction?

A Section 125 deduction is not the same as a 401(k) deduction, even though both come out of pay before federal income tax. A Section 125 deduction also skips the 6.2% Social Security tax and the 1.45% Medicare tax, while a traditional 401(k) deferral still pays both, according to IRS Publication 15-B and IRS Publication 15. The money also goes to different places. A Section 125 deduction pays for current benefits, such as this year's health premium or FSA expenses. A 401(k) deferral goes into a retirement account the employee owns. On a pay stub, the difference shows up in the wage lines: federal taxable wages drop for both, but Social Security and Medicare wages drop only for the Section 125 amount. For the Illinois employee in our example, adding a $100 biweekly 401(k) deferral would cut federal taxable wages to $1,688.00, while Social Security and Medicare wages would stay at $1,788.00. Both deductions are worth taking when an employer offers them, because each one lowers a different set of taxes on the same paycheck.

How does a Section 125 deduction show up on a W-2?

A Section 125 deduction shows up on a W-2 as lower numbers in Box 1 (wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages) than the employee's gross pay. In the Illinois example, all three boxes would be $5,512.00 lower than the $52,000 salary, reported as $46,488.00, assuming no other pre-tax deductions. Employers are not required to list Section 125 amounts separately, but many add an informational line in Box 14 labeled S125, SEC 125, or CAFE 125, per the IRS General Instructions for Forms W-2 and W-3. Box 12 code DD reports the total cost of employer-sponsored health coverage, which is informational only and does not add to taxable income. When Box 1 looks too low, the Section 125 deductions from each pay stub are usually the reason. Adding up the year's Section 125 lines from the final pay stub should close the gap between gross pay and Box 1 almost to the dollar.

The Box 14 details are covered in our guide to S125 in Box 14 of a W-2→, and the Section 125 guide for W-2 employees→ explains the same wages from the employee side. Summit Health Benefits also has a plain-English walkthrough on why Section 125 reduces W-2 wages↗.

Can I change or stop my Section 125 deduction mid-year?

A Section 125 deduction generally cannot be changed or stopped in the middle of the plan year unless the employee has a qualifying life event that the plan allows. Treasury Regulation 1.125-4 lists the permitted events, including marriage, divorce, birth or adoption of a child, a spouse gaining or losing coverage, a change in employment status, and certain changes in the cost or coverage of a plan. The election change must be consistent with the event, so a new baby supports adding the child to medical coverage but does not support dropping a health FSA. The plan document sets the deadline for the request, so the employee should contact HR as soon as the event happens. Outside those events, the next chance to change a Section 125 deduction is open enrollment for the following plan year. Employees who expect a big change, such as a spouse starting a new job with benefits, should ask HR how the plan handles that event before it happens.

1. Write down the date of the life event.
2. Ask HR for the plan's change-request form and deadline.
3. Submit proof, such as a marriage certificate or a new coverage notice.
4. Check the next pay stub to confirm the Section 125 line changed.

FSA amounts have their own limits. See the 2026 FSA contribution limits→ before changing a health or dependent care election.

What should I do if my paycheck has no Section 125 deduction?

An employee whose pay stub shows health premiums taken after tax, with no Section 125 or CAFE 125 line, should ask HR whether the company has a Section 125 plan. Without a cafeteria plan, the employee pays federal income tax, FICA, and usually state tax on money that only goes to insurance premiums. Using the Illinois example, that costs $52.14 every two weeks, or $1,355.64 over a year. A premium-only plan is the simplest Section 125 plan an employer can adopt, and the employer saves 7.65% FICA on the same dollars, so the request is not a hard sell. Many small employers simply never set one up because no one asked. A short, polite email that mentions the employer's own savings is the easiest way to start that conversation.

If your employer wants help, Benecor Health sets up compliant Section 125 plans and can model the savings for your whole team. HR can request a free Section 125 savings review→ in a few minutes.