Common questions

Is Section 125 subject to Social Security tax?


Is Section 125 subject to Social Security tax?

Certain contributions made through a Section 125 plan are exempt from federal income tax in the usual way but they are subject to Social Security and Medicare taxes. These benefits include 401(k) contributions and adoption assistance.

Does a cafeteria plan reduce Social Security?

Since 1978, cafeteria plans have allowed workers to divert some of their pre-tax pay toward fringe benefits, thus reducing their tax burden. As a result of the payroll tax deduction, those who contribute more to cafeteria plans both pay less taxes and ultimately receive lower Social Security benefits.

Is pre-tax health insurance subject to Social Security tax?

Pretax health insurance deductions are not considered part of an employee’s salary and are therefore not subject to Social Security (FICA) taxes. As a result of the reduction in FICA taxes, an employee’s Social Security benefit amount received at retirement may be slightly reduced.

What benefits can be included in a cafeteria plan?

Cafeteria plans allow employees to choose from a variety of pre-tax benefits. These plans are often more flexible than others. Employees have several pre-tax options including insurance benefits, retirement plans, and benefits that help with life events.

Who Cannot participate in a cafeteria plan?

Unlike the other business types, spouses, children, parents, and grandparents of more-than-2% shareholders may NOT participate in the cafeteria plan. Like partners in a partnership, more-than-2% shareholders may be able to make a tax deduction outside the cafeteria plan for medical and long-term care expenses.

What is included in a section 125 cafeteria plan?

A Section 125 Cafeteria Plan is an employer-sponsored benefits plan that lets employees pay for certain qualified medical expenses – such as health insurance premiums – on a pre-tax basis. Typically, they can use the pre-tax money to pay for health insurance premiums, retirement deposits, or other benefit options.

What deductions are not subject to Social Security tax?

Accident and health insurance premiums for employees and their dependents. Payments to newspaper carriers under age 18. Noncash compensation for household work, agricultural labor or service not in the employer’s trade or business. Railroad retirement income.

Do pretax deductions affect Social Security?

Social Security: Pretax deductions reduce the salary used to calculate your Social Security benefit at retirement. The impact on your Social Security, however, is typically minor. Most of the time, the money you save through pretax deductions outweighs any benefit gained by waiving the deduction.

What happens to your taxes if you have a section 125 plan?

With pre-tax benefits, you deduct the employee’s contribution before you withhold taxes, reducing their taxable income. Typically, the employee pays less in federal income and/or FICA (Social Security and Medicare) taxes. This also lowers your FUTA tax liability.

Do you need a section 125 health savings account?

Health Savings Account (HSA) If you decide your business will offer a section 125 plan, cafeteria plan, or HSA to its employees, you’ll need to include the plan(s) as part of your annual enrollment period, so that eligible employees may sign up, maximize the usage of your new benefits, and potentially save money on taxes.

How does the section 125 cafeteria plan work?

About the Section 125 Plan (Cafeteria Plan) A section 125 plan is part of the IRS code that enables and allows employees to take taxable benefits, such as a cash salary, and convert them into nontaxable benefits. These benefits may be deducted from an employee’s paycheck before taxes are paid.

When do I pay a per participant fee for Section 125?

A per participant fee is most commonly charged when the Section 125 Plan includes the ability for employees to deposit pre-tax money into a Flexible Spending Account (FSA). In this case, the plan administration includes more than just an annual update to the Section 125 plan document.