Learn / Section 125 plans
Section 125 cafeteria plans and your paycheck
If your paycheck has a line for health insurance or an FSA contribution taken out before taxes, that's very likely a Section 125 “cafeteria plan” benefit — and it's one of the more powerful pre-tax deductions available to employees.
What Section 125 actually is
Section 125 of the tax code lets employers offer a menu (hence “cafeteria”) of qualified benefits — typically health insurance premiums, Flexible Spending Accounts (FSA), and dependent care assistance — that employees can pay for using pre-tax payroll deductions instead of after-tax dollars.
Why it reduces more than just your income tax
This is the detail that makes Section 125 meaningfully different from something like a traditional 401(k): a 401(k) contribution lowers the income used for federal (and usually state) income tax, but Social Security and Medicare wages are unaffected. A Section 125 deduction, by contrast, is generally excluded from all of them — federal income tax, most state income tax, and FICA wages (Social Security and Medicare) alike.
In practical terms, that means a Section 125 deduction can lower your FICA tax slightly too, not just your income tax — something a 401(k) contribution of the same dollar amount doesn't do.
What it looks like on your pay stub
Common Section 125 line items include your share of health insurance premiums, a Health FSA contribution, or a Dependent Care FSA contribution. These are usually shown as deductions taken before the “taxable wages” figure your withholding is calculated from.
Seeing the effect on your own paycheck
The calculator below has a dedicated “Health / other, per paycheck” field that models exactly this kind of pre-tax deduction — enter your real premium or FSA amount to see precisely how it changes your federal tax, FICA, and take-home pay.