Section 125 plans allow
businesses to save Social Security (FICA), as well as federal unemployment
taxes (FUTA) and generally, state unemployment taxes, on the money
employees contribute to their premiums. Employer tax savings can average
7 to 10 percent of employees' contributions.
Premium contributions are automatically deducted from employee salaries
before taxes are taken out. Because their taxable income is reduced
by the amount they contribute, employees pay less taxes on the money
they earn. Employees see a savings in their FICA, federal, and, in
most cases state, income taxes. When employees become more aware of
how they spend money on benefit items, they also tend to practice
more cost-containment, resulting in savings for everyone.
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