Section 125 Plan Payroll Tax Reduction Benefits
How Payroll Tax Reduction Works With 125 Plans
Section 125 Plans let employees set aside a portion of their wages on a pre-tax basis to cover qualified benefits like health insurance, dental and vision premiums, telemedicine access, and even lifestyle perks like identity protection or pet care.
Here’s the win for your business:
Pre-tax elections reduce your total taxable payroll
You pay less in FICA (Social Security and Medicare) taxes
The more participation, the greater your savings
A Quick Example:
If 15 employees each contribute $2,400/year toward pre-tax benefits:
Total pre-tax reduction = $36,000
Employer payroll tax savings (7.65% FICA) = $2,754 saved annually
You offer valuable benefits and put thousands back into your company—all while improving morale and retention.
What Qualifies for Pre-Tax Elections?
Under IRS rules, a wide range of benefits can be offered through a 125 Plan—legally and without triggering additional employer costs.
Popular pre-tax eligible items include:
Health insurance premiums (medical, dental, vision)
Premium Only Plans (POP)
Flexible Spending Accounts (FSAs and DCAP)
Commuter and parking benefits (Section 132)
Wellness and preventive care options
Telemedicine and urgent care access
Health information library access
Identity theft protection
Pet care services (when bundled as wellness)
Prescription coverage with $0 copays
These aren’t fringe perks—they’re everyday services your team already wants. The 125 Plan just lets you offer them more efficiently.
How Much Can Your Business Save?
It depends on the size of your team and the level of employee participation. But on average, employers save 7.65% in payroll taxes on every dollar shifted to pre-tax benefits.
Here’s a breakdown by participation level:
| Employees Participating | Annual Pre-Tax Contribution | Payroll Tax Savings |
|---|---|---|
| 10 | $2,000 each ($20,000 total) | $1,530 |
| 25 | $2,400 each ($60,000 total) | $4,590 |
| 50 | $3,000 each ($150,000 total) | $11,475 |
Over five years, that adds up to tens of thousands in savings—and you’ll never have to cut payroll or reduce hours to get there.
Disclaimer: Section 125 Solutions LLC does not provide legal or tax advice. Estimates are for informational purposes only. Plan setup and compliance are handled by qualified third-party administrators.
Better Benefits Without Raising Costs
Section 125 Plans give you a powerful advantage: you can enhance your benefit offering without increasing your costs.
In fact, many companies use the savings from reduced payroll taxes to:
Offset the cost of new benefit add-ons
Fund employee education stipends or wellness initiatives
Invest in retention or recruitment programs
Simply reinvest the savings into growth
This is how you turn a tax-saving tool into a revenue-building strategy.
Why This Works for Any Industry
No matter what kind of business you run this approach fits right in From construction crews to tech teams and everyone in between smart benefits like these create real savings without adding pressure to your budget or your bottom line.
We’ve helped small and mid-sized businesses across a wide range of sectors—including:
- Construction & Contractors: Offset rising healthcare costs
- Restaurants & Hospitality: Support hourly teams with pre-tax perks
- Professional Services: Offer better benefits without raising salaries
- Remote & Tech Startups: Deliver flexible, tax-efficient options
- Franchises & Retail: Save across multiple locations with one plan
- Healthcare & Nonprofits: Stretch tight budgets while caring for staff
Wherever payroll exists, so do savings opportunities.
Curious What You Could Save? Try Our Calculator
Section 125 Plans make it easy to offer better employee benefits without raising costs. If you’re looking to reduce payroll taxes and increase take-home pay for your team, this quick tool will show you what kind of impact a 125 Plan could have on your bottom line.
Use it to:
Get a quick estimate of your annual payroll tax savings
See how much your employees could save each year
Decide if now’s the time to upgrade your benefits strategy
Disclaimer: This calculator is for informational purposes only and does not guarantee exact results. Actual savings may vary based on your plan design, employee participation, and payroll setup. For a personalized estimate, please schedule a consultation with our team.
Book Your Consultation
Explore how Section 125 plans could save your business over $1,000 per W-2 employee each year. Book a free consultation to see how much you could be losing by not having one.
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