06 May Cut payroll taxes and boost take-home pay with Section 125
Section 125 plan
If you’re a small business owner, you already know every dollar counts. But what you might not know is that many businesses—just like yours—are overpaying in taxes every year simply because they’re not using available benefit structures like Section 125 plans. (Cut payroll taxes and boost take-home pay with Section 125 plans | Cafeteria plans —here’s how small businesses benefit.)
The IRS has given employers a completely legal, highly effective way to reduce payroll tax liability, lower business expenses, and boost employee satisfaction all at once.
It’s called the Section 125 plan, and it’s one of the best-kept secrets in small business tax strategy.
What Is a Section 125 Plan?
A Section 125 plan, also known as a cafeteria plan, allows employees to pay for certain qualified benefits—like health insurance, dental and vision coverage, and dependent care—using pre-tax dollars.
Instead of paying for these out of their post-tax paycheck, employees elect to have these amounts deducted before taxes are applied. The result? Lower taxable income for them, and lower payroll tax obligations for you.
Key Tax Benefits for Employers
Offering a Section 125 plan isn’t just a “nice” perk—it’s a tax strategy.
Here’s how small businesses benefit:
✔ Reduced Payroll Taxes
Every dollar employees contribute to pre-tax benefits lowers your total taxable payroll. That means you pay less in FICA (Social Security and Medicare taxes).
✔ Reduced FUTA and SUTA Obligations
Because your reported wages are lower, your federal and state unemployment taxes (FUTA and SUTA) also go down.
✔ No Employer Contributions Required
Unlike health plans where you foot part of the premium, a Section 125 plan allows employees to contribute their own money—you just facilitate it.
✔ Tax-Efficient Compensation Boost
It’s one of the easiest ways to give your team more value without increasing salary costs or adding stress to your budget.
📎 Learn more from SBA.gov about managing benefits and payroll taxes for small businesses.
How It Reduces FICA and FUTA
Let’s look at the math behind the savings:
Employers pay 7.65% in FICA taxes (6.2% Social Security + 1.45% Medicare) on employee wages.
If an employee contributes $3,000 annually to pre-tax benefits, you don’t pay FICA on that $3,000.
That’s a $229.50 annual savings per employee—just on FICA.
Multiply that across a small team, and you’re looking at thousands in savings.
Add FUTA and SUTA reductions, and the benefits grow even more.
Case Study: Savings Example for a 10-Employee Team
Company Profile:
10 full-time employees
Each contributes $3,000/year in pre-tax benefits
Total pre-tax contributions: $30,000/year
Tax Savings Breakdown:
| Tax Type | Savings Rate | Annual Savings |
|---|---|---|
| FICA | 7.65% | $2,295 |
| FUTA & SUTA | ~1–2% | ~$300–$600 |
| Total | — | $2,595–$2,895/year |
💡 Alt Text Idea: Example of employer tax savings with Section 125 plan
These savings increase with team size—and you don’t have to contribute a dime toward employee premiums to unlock them.
5 Common Tax-Saving Use Cases for Section 125 Plans
Here are the most popular and effective ways small businesses use a Section 125 plan for tax savings:
Premium Only Plans (POP): Employees pay for their portion of health premiums with pre-tax dollars.
Flexible Spending Accounts (FSAs): Employees set aside pre-tax dollars for medical or childcare expenses.
Dependent Care Assistance: Great for working parents—up to $5,000/year in pre-tax childcare spending.
Commuter Benefits: Pre-tax transit or parking expenses in applicable metro areas.
Supplemental Benefits: Covers things like dental, vision, critical illness, and accident plans.
Explore an affordable Section 125 plan for small businesses that offers all of the above in a bundled, easy-to-manage package.
FAQs
❓ How much can a small business save with a Section 125 plan?
Savings depend on employee participation, but even small companies often save thousands per year in payroll taxes. On average, expect $200–$500+ per employee annually.
❓ Do employees get taxed?
No. Employees save money too. Because contributions are pre-tax, their take-home pay increases even without a raise.
❓ Can I offer this to part-time workers?
Yes, if they meet eligibility requirements. Some employers choose to offer Section 125 benefits to part-timers to boost retention and competitiveness.
Final Thoughts: A Simple, Smart Way to Cut Costs and Boost Benefits
If you’re searching for ways to reduce business taxes while supporting your team, a Section 125 plan for small businesses is one of the most efficient, low-lift solutions available.
You can lower your payroll tax burden, increase employee satisfaction, and enhance your benefits offering without increasing your overhead.
✅ Get a Free Quote for Your Business from The Policy Shop
Ready to explore what kind of savings and support a Section 125 plan can bring to your company?
Get a free quote from The Policy Shop and see how our expert-backed strategy can turn tax law into long-term value—for you and your team.