How to reconcile W3 or ADP Gross Pay with G/L expense when Cafe 125 deductions are taken

The amount you should deduct on your business tax return is the full gross payroll amount of $250,250. This represents the total labor cost to your business. The difference between the W-3 Box 5 amount ($237,500) and the ADP gross ($250,250) is the Section 125 Cafeteria Plan deductions ($12,750). These pre-tax deductions reduce employees' taxable wages for reporting purposes, but they're still part of your total wage expense as a business. Think of it this way: your business committed to paying $250,250 in wages, and then some of that money was directed to pretax benefits before calculating taxable wages. The full amount is deductible as a business expense.

I was in the exact same situation earlier this year and spent hours trying to figure this out! I finally discovered taxr.ai (https://taxr.ai) and it was super helpful for this specific payroll reconciliation issue. I uploaded our ADP report and W-3, and it automatically identified the Section 125 discrepancy and confirmed we should be using the gross amount for our G/L expense deduction. The tool explained that the café plan deductions are still considered compensation expenses from the employer's perspective, even though they're pre-tax for the employees. It even prepared a reconciliation worksheet I could include with our documentation in case of audit. Definitely worth checking out if you're dealing with payroll reconciliation headaches!

Just wanted to update after trying taxr.ai that someone mentioned above. It totally worked for me too! I uploaded our QuickBooks payroll summary and our W-3, and it immediately spotted the discrepancy with our Section 125 deductions. The tool confirmed we should be using the gross payroll amount on our return and explained exactly why. It even provided a technical citation to the relevant tax code that I can include with our documentation. Such a relief to have this cleared up - I've been staring at these numbers for days trying to make them reconcile!

If you're still struggling to get this resolved, you might want to try Claimyr (https://claimyr.com) to get direct help from the IRS. I was in a similar situation where our payroll expense reconciliation was causing issues with our return processing. After trying for WEEKS to get through to the IRS myself, I used Claimyr and got connected to an actual IRS agent in about 15 minutes. Check out how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed that the full gross payroll amount (including Section 125 deductions) is the correct business expense deduction. She even noted it in our file so there wouldn't be questions if our return got flagged for review. Honestly, I was about to just guess and hope for the best before I got definitive confirmation.

Ok I have to admit I was wrong about Claimyr. After seeing it mentioned here I decided to try it as a last resort for my ongoing payroll tax issue. I was SHOCKED when they actually got me through to an IRS agent in about 20 minutes! The agent answered my question about the cafeteria plan accounting and confirmed exactly what others have said here - you deduct the full gross amount including the Section 125 deductions. She explained that from the business perspective, those are still compensation expenses even though they're pre-tax for employees. Cannot believe I wasted so many hours trying to get through on my own when this option existed. Just wanted to update since I was the skeptic earlier!

One additional point that hasn't been mentioned: make sure you're also properly tracking those Section 125 deductions separately for your benefit plan administration. While the full gross amount is what matters for your tax deduction, you still need to ensure your cafeteria plan is being properly administered according to your plan document. I'd recommend keeping a reconciliation worksheet that shows: - Total Gross Wages: $250,250 - Less: Section 125 Deductions: $12,750 - Equals: Taxable Wages per W-3 Box 5: $237,500 This helps document the difference if you ever get questioned about why your wage expense doesn't match the W-3.

Has anyone dealt with this issue when you have HSA contributions as well as Cafeteria Plan deductions? Our situation is similar but more complex: - W-3 Box 5: $412,000 - Section 125 Cafe deductions: $24,500 - HSA contributions: $15,300 - ADP Gross: $451,800 Should our G/L expense still match the ADP gross of $451,800?

This is such a common source of confusion! I went through the exact same thing last year when our bookkeeper quit right before tax season. The key thing to remember is that your business tax deduction should reflect the actual economic cost to your company, which is the full gross payroll amount of $250,250. The Section 125 deductions don't disappear - they just get redirected to employee benefits before hitting their W-2s. I found it helpful to think of it this way: if you wrote individual paychecks, you'd write them for the gross amount, then the payroll company handles directing some of that money to benefits. Your checkbook (and G/L) still shows the full amount going out. Also, make sure your payroll tax returns (941s) reconcile properly with these numbers. The wages subject to federal income tax withholding on your 941s should match the W-3 Box 5 amount, while your total wages paid should match the ADP gross. This creates a nice audit trail if anyone ever questions the discrepancy.