Section 125 plans, or “cafeteria plans,” are a powerful and often overlooked option for reducing payroll taxes and improving employee benefits. These plans allow employees to pay for eligible expenses with pre-tax dollars, reducing their taxable income and, in turn, your business’s payroll tax liability. Here’s how implementing Section 125 plans can benefit your business.

What is a Section 125 Plan?
Section 125 plans, authorized by the IRS, enable employees to allocate pre-tax dollars for expenses like health insurance premiums, flexible spending accounts (FSAs), and dependent care accounts. By lowering employees’ taxable income, these contributions reduce payroll taxes, which benefits both employees and employers.

Key Benefits for Employers

1. Payroll Tax Savings:
   Every dollar employees contribute to a Section 125 plan reduces the payroll tax amount your business owes. For many businesses, this translates to annual savings of $600–$800 per employee. The tax reduction applies to Social Security, Medicare, and FUTA taxes, offering substantial long-term savings.
2. Increased Employee Satisfaction:
   Employees appreciate the financial relief that comes from paying for qualified expenses with pre-tax income, as it increases their take-home pay. Offering these options shows your business is invested in their financial well-being, which can improve morale and employee retention.
3. Attracting and Retaining Top Talent:
   In today’s competitive job market, benefits are a key factor in attracting and keeping skilled employees. Section 125 plans enhance your benefits package affordably, making your company more appealing to prospective hires and fostering loyalty among current employees.

How Section 125 Plans Work
To implement a Section 125 plan, employers set up a formal plan document that outlines available pre-tax benefits. Employees then choose their benefits and allocate a portion of their salary toward them, with contributions automatically deducted from each paycheck. Renaissance Advisory guides businesses through the entire setup process, ensuring compliance and maximizing savings.

Example: A Staffing Company’s Success
One of our clients, a staffing company with 720 employees, saved over $500,000 annually in payroll taxes by implementing a Section 125 plan. This solution not only lowered tax liabilities but also boosted employee morale by offering a valued financial benefit, allowing the company to reinvest savings in other business areas.

Getting Started with Renaissance Advisory
Setting up a Section 125 plan is a simple yet impactful way to reduce payroll taxes and enhance your benefits package. Renaissance Advisory handles the setup and ongoing management, helping you tailor the plan to your workforce. Interested in a Section 125 plan? Contact us for a free consultation and unlock the potential of pre-tax benefits for your business.