Section 125 Tax

An election under section 83 i applies only for federal income tax purposes.

Section 125 tax. Employees receive benefits as pre tax deductions. The election has no effect on the application of social security medicare and unemployment taxes. Employees their spouses and dependents can all benefit from section 125 plans.

Section 125 is the section of the irs tax code where the items that can be deducted from employee pay on a pre tax basis are defined. 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. Highly compensated participants as to contributions and benefits.

The professionals at paychex make section 125 plans even more appealing by handling much of the frustrating work required to start and manage them so you can relax and enjoy the benefits. A section 125 premium only plan pop and flexible spending account fsa also known as cafeteria plans can reduce fica federal and state and local taxes for your company and employees when combined with your company s group health insurance. A plan offering only a choice between taxable benefits is not a section 125 plan.

Section 125 cafeteria plans also provide several important advantages to employers especially those who own a small business. And because the section 125 cafeteria plan reduces employee gross income the employer also sees a reduction in payroll tax liability by eliminating matching fica taxes of 7 65 and possibly workers compensation as well depending on your state. These benefits may be.

In the context of section 125 pre tax means that a deduction is exempt from federal income tax withholding social security and medicare taxes. Because section 125 cafeteria plan benefits are exempt from federal and state income tax an employee s taxable income is reduced which increases take home pay. Irs code 125 benefits.

Except as provided in subsection b no amount shall be included in the gross income of a participant in a cafeteria plan solely because under the plan the participant may choose among the benefits of the plan. A section 125 plan is the only means by which an employer can offer employees a choice between taxable and nontaxable benefits without the choice causing the benefits to become taxable. Reduced payroll taxes for employees who participate in the 125 cafeteria plan.