What Are FICA Taxes?
FICA stands for the Federal Insurance Contributions Act. It's the payroll tax that funds Social Security (6.2%) and Medicare (1.45%), totaling 7.65% from both employers and employees. Every dollar of taxable wages is subject to FICA on both sides of the paycheck.
That means for every $1,000 in wages, $76.50 comes out of the employee's check and another $76.50 comes from the employer. Combined, that's $153 in FICA taxes per $1,000.
How Section 125 Reduces FICA Taxes
When employee benefit premiums are paid through a Section 125 plan, those contributions are deducted before FICA taxes are calculated. This reduces the taxable wage base for both the employer and employee.
Here's what that means in practice:
Without Section 125
- Gross Wages: $3,500/month
- FICA (7.65%): -$267.75
- Health Premium: -$100 (after-tax)
- Employer FICA cost: $267.75
With Section 125
- Gross Wages: $3,500/month
- Health Premium: -$100 (pre-tax)
- Taxable Wages: $3,400
- FICA (7.65%): -$260.10
- Employer FICA cost: $260.10
Annual FICA Savings by Company Size
The savings scale with your workforce. Here's what typical employers save in FICA taxes alone with a Section 125 supplemental plan:
| Employees | Annual Contributions | Employer FICA Savings | Employee FICA Savings |
|---|---|---|---|
| 25 | $30,000 | $2,295 | $2,295 |
| 50 | $60,000 | $4,590 | $4,590 |
| 100 | $120,000 | $9,180 | $9,180 |
| 250 | $300,000 | $22,950 | $22,950 |
| 500 | $600,000 | $45,900 | $45,900 |
Based on $1,200 annual contribution per employee. Actual savings depend on participation rates and plan design.
Why Most Employers Miss This Savings
Many employers offer health benefits but don't structure them through a Section 125 plan. When premiums are deducted after-tax, neither the employer nor employee gets FICA savings. The money is simply left on the table.
Common reasons employers miss out:
- Unaware of Section 125: Many small and mid-size employers don't know pre-tax deductions are available for supplemental plans
- Assume it's too complicated: A proper Section 125 plan requires a plan document and compliance, but turnkey providers like Optiv handle everything
- Only using post-tax deductions: Payroll may be set up for after-tax deductions by default
FICA Savings Are Just the Beginning
While FICA tax savings are significant on their own, they're just one part of the total value a Section 125 supplemental plan delivers:
- FICA tax reduction: 7.65% savings on all pre-tax contributions
- Federal and state income tax savings: Employees also save on income taxes
- Healthcare cost reduction: 24/7 telehealth and free medications reduce ER visits and absenteeism
- Turnover cost savings: Better benefits improve retention, saving $5,000-$15,000 per avoided replacement
Calculate Your FICA Savings
See exactly how much your company could save with a Section 125 supplemental plan.
Use the Savings Calculator