Payroll Tax Savings for Business


Section 125 Cafeteria Plan - Premium Only Plan

What is Section 125?

The US Congress created Code section 125 in an effort to make benefit programs more affordable for employees.

Section 125 is part of the IRS Code that allows employees to convert a taxable cash benefit (salary) into non-taxable benefits. Under a Section 125 program you may choose to pay for qualified benefit premiums before any taxes are deducted from employee paychecks.

The Section 125 program is a tremendous opportunity for you to enhance your benefits package.

The Premium Only Plan is the building block of the Section 125 Plan. It allows for certain employee paid group insurance premiums to be paid with pre-tax dollars. The qualified premiums (if offered by employer) are:

Health

Prescription

Dental

Vision

Disability (not recommended)

Employee Group Term Life (up to $ 50,000.00)

Cancer

Medicare Supplement

Hospital Indemnity

Accident

Employee Savings

Employees can save 20 - 40% of their payroll deductions. The savings are on city, state, and federal income taxes, including Social Security and Medicare.

Flexible Spending - Healthcare Account


It’s not what you earn, it’s what you keep that counts!

Flexible Spending Accounts let you set aside a portion of your paycheck tax free to pay for certain health and dependent care expenses. Contributions are deducted from your paycheck prior to federal, state and social security taxes.  No tax on your contribution saves you money (see chart below).

 

 

Yes

No

Are you and your family currently spending more than $200 per year in out-of-pocket expenses such as:

§       prescription copays and medicine

§       doctor visit copays

§       dental work - orthodontia

§       eyeglasses/contacts/laser eye surgery

§       chiropractic or acupuncture

§       over-the-counter medicines (effective 1/1/2011 no longer an eligible FSA expense because of Health Care Reform)

 

Is it impossible to reach the 10 % of your adjusted gross income as a medical tax deduction?

 

 

 

If you answered ‘yes’ to any of these questions you should be participating in a Flexible Spending Account.

An example of tax rates and estimated savings below, check with your tax advisor for more specifics:

Flexible Spending Account

Annual Employee Contribution

Tax Savings Single

Tax Savings Married

FSA Healthcare

$2000.00

$560.00

$820.00

 

*Tax Rates:

Single

Married

 

Federal

15%

28%

 

State (MA listed)

5.30%

5.30%

 

FICA

6.20%

6.20%

 

Medicare

1.45%

1.45%

 

Total

28%

41%

Section 125 Dependent Care Guidelines

IRS form 2441 should be filed with your tax form 1040 when dependent care has been deducted from your pay.   The Dependent Care deduction should be shown in box 10 of the W2 form from your employer. 

Employer provided dependent care assistance is tax-free only if the following conditions are met:

1.               Each individual for whom you receive dependent care assistance is;

a)               A dependent under the age of 13 whom you are entitled to claim as a dependent on your tax return, or

b)               A spouse or other tax dependent that is physically or mentally incapable of caring for him or herself (special rules apply to certain circumstances where non-custodial parents are entitled to claim the individual as a dependent).

2.               The dependent care assistance is provided for the care of a dependent described above or for the related household service and is incurred to enable you to be gainfully employed.

3.               If the dependent care services are provided outside your household, they are incurred for the care of a dependent that is described in 1a) above or who regularly spends at least 8 hours per day in your household.

4.               If the dependent care is provided by a dependent care center (i.e. a facility that provides care for more than 6 individuals not residing at the facility) the center complies with all applicable state and local laws and regulations.

5.               If the service is a camp provided service, the dependent does not stay overnight at the camp.

6.                Payment for the services are not made to a child of yours who is under the age of 19 at the end of the year for which the expenses are incurred or to an individual for whom you or your spouse is entitled to a personal tax exemption as a dependent.

7.               The reimbursement (or fair market value of the dependent care expenses) are provided for the applicable year and may not exceed the least of the following limits:

a)               $5000 ($2500 if you are married and do not file a joint tax return for the year)

b)               Your taxable compensation (after any reductions under the 401(k) plan, dependent care assistance plan and medical/dental plans)

c)               If you are married, your spouse’s actual deemed earned income.

For purposes of 7a) above, if two employees are married to each other and file a joint tax return, a single $5000 limit applies to both spouses together.  For purposes of 7c) above, your spouse will be deemed to have earned income of $200 ($400 if you have 2 or more dependents described in paragraph 1) above) for each month in which your spouse is: Physically or mentally incapable of caring for him or herself or a full time student at an educational institution.  For all purposes of paragraph 7) above, certain separated spouses are not treated as married.

8.               You must report to the IRS on your tax return the name, address and social security number (or other tax payer identification number, if required) of any dependent care service provider who provides services to you during the relevant calendar year).

Contact us for more information.