Employer guide
Section 125 payroll savings example for 25 employees
A qualified pre-tax deduction can lower the wages you pay Social Security and Medicare tax on. If 25 employees each move $120 a month from after-tax to qualified pre-tax health premiums, the employer could save $2,754 in federal payroll taxes over a full year in this example.
See what your business could saveFollow the math
This example assumes all 25 people take part for the full year, their pay subject to Social Security is below the 2026 cap of $184,500, and the full deduction qualifies for both taxes. The premium was paid after tax before the change.
| Step | Math | Result |
|---|---|---|
| Find the yearly deduction for one person | $120 × 12 months | $1,440 |
| Find the total change in taxable wages | $1,440 × 25 people | $36,000 |
| Find the employer’s Social Security tax change | $36,000 × 6.2% | $2,232 |
| Find the employer’s Medicare tax change | $36,000 × 1.45% | $522 |
| Add the two tax amounts | $2,232 + $522 | $2,754 |
Work out what you keep
If the plan adds $900 in yearly fees and no other new costs, the business would keep $1,854 in this example. Ask for setup fees, monthly fees, and any new employer contributions in writing.
Use the change from your current payroll. If the same amount already comes out before tax, moving it to a new plan does not create that savings again.
Ask payroll for a before-and-after check
- Which dollars will change from after tax to pre-tax?
- How many people are likely to join, and for how many months?
- What changes on the tax report after one test run?
Sources
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