Tax Savings Explained in 2 Minutes
What Is Tax Savings Through a Section 125 Plan?
A Section 125 Plan, sometimes called a Cafeteria Plan, is an IRS-approved program that allows employees to pay for certain benefits before taxes are applied to their paycheck. That means the money used for eligible benefits is not taxed—leading to savings on both sides.
Here’s what that means in action:
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Less taxable income for the employee
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Lower payroll tax liability for the employer
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More value from every paycheck
By reducing taxable income, you also reduce what’s owed in:
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Federal income tax
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Social Security tax
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Medicare tax
And depending on where you operate, even state income taxes may be lowered.
How Section 125 Tax Savings Help Employers
Every dollar that an employee sets aside under a Section 125 Plan is exempt from employer-paid payroll taxes like FICA (Social Security and Medicare). That means as a business owner, you’re not taxed on those amounts—saving you money.
Real Example:
Let’s say your team has 15 employees, and each chooses to contribute $2,000 per year in pre-tax dollars for health-related benefits.
Total pre-tax deductions = $30,000
Employer FICA tax savings = 7.65% of $30,000
Annual savings = $2,295
Multiply that by your team size, and the long-term savings can be substantial—especially since these savings renew year after year.
How Section 125 Plans Help Employees Save
Most benefit plans help a little but cost a lot. This one does the opposite. Section 125 Plans quietly boost your team’s take-home pay without touching your payroll budget. If you want happier employees without spending more this is where it starts:
Now let’s look at your employees.
By reducing taxable income through pre-tax benefits, your team members:
Owe less in federal income tax
Pay less in Social Security and Medicare taxes
End up with more net income—without a raise
Quick Example:
Your employee earns $50,000/year. They use $3,000 pre-tax for benefits.
Without a 125 Plan, they’re taxed on $50,000
With a 125 Plan, they’re taxed on $47,000
That’s an extra $600–$1,000 in annual savings depending on their tax bracket
It’s like giving a raise—with zero increase to your payroll budget.
Why These Tax Savings Matter Now
In today’s economy, both employers and employees are looking for smarter ways to stretch their dollars. Tax savings from a 125 Plan offer:
Instant, recurring savings on every payroll cycle
A competitive edge in hiring and retention
A way to offer modern, meaningful benefits—without increasing operating costs
Most importantly, it’s a benefit your employees can feel. They’ll notice their paycheck goes further. And that’s the kind of impact that builds loyalty.
How Are These Tax Savings Legal?
The tax savings from a Section 125 Plan are backed by federal law—specifically, Internal Revenue Code Section 125.
To keep these savings compliant and secure, employers must:
Use written plan documents
Offer fair enrollment to eligible employees
Conduct nondiscrimination testing (when required)
Ensure accurate payroll deductions
Work with a trusted plan administrator
That’s where we help.
Section 125 Solutions LLC connects you to fully vetted plan providers who handle everything—from paperwork to compliance—so you get all the savings, minus the stress.
Disclaimer: We do not offer legal or tax advice. We act as a referral partner, helping businesses access trusted third-party plan administrators who are qualified to manage and maintain compliant Section 125 Plans.
Ready to Unlock Your Tax Savings?
If you’re looking for a better way to offer benefits, lower your tax burden, and boost your team’s financial well-being—a Section 125 Plan is a smart place to start.
We make it simple to connect with experienced plan administrators who do it right.
Ready to Reduce Your Business Tax Burden?
Start saving money with a Section 125 Plan today.
- Request your free tax savings estimate
- Connect with a vetted plan provider
- See how much you can save this month
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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