Cafeteria Plan Training Excerpts
Employer Benefits From A Cafeteria Plan
In addition to the positive feelings from happy employees who enjoy the tax savings created by using a Cafeteria Plan, employers that offer Cafeteria Plans also save money by paying less in matching payroll taxes.
How? Employees who pay their eligible expenses with pre-tax dollars are essentially reducing their taxable income.
The employer saves money because its payroll tax payments are based upon the total of its employees' taxable earnings. Thus, because the employees' taxable wage base is reduced by the amount of benefit dollars spent under a Cafeteria Plan, the employer pays less taxes too!
Employee Savings Example: Bob, an employee of SuperDuper Supermarkets, qualifies to participate in SuperDuper's Dependent Care Program.
Bob and his family elect the maximum allowable annual payment of $5,000 to be deducted in equal amounts from Bob's paycheck each month on a pre-tax basis. Bob and his family are in the 22% tax bracket, and thus save $1,100 annually (30% of the $5,000).
Employer Savings Example: Because SuperDuper pays matching payroll taxes on taxable income, SuperDuper saves by paying less in payroll taxes.
Assuming an aggregate 8% payroll tax for employer FICA and FUTA taxes, SuperDuper saves $400 annually on matching payroll taxes because of Bob's election.
Multiply this savings by any number of additional employees also utilizing a Dependent Care Account, and you can see that SuperDuper can save a substantial sum each year!
Note: The tax savings on matching payroll taxes is determined by summing the payroll tax percentages for federal FICA, FUTA, and any other applicable payroll tax. In all instances, employers can count on the minimum tax savings of 7.65% applicable to federal FICA taxes. While the ability to reduce workers' compensation and state unemployment taxes will vary from state to state (many states do not allow for the reduction of such payroll taxes), blue collar industry companies in states permitting such reductions in workers' compensation rates, for example, would save more on an average tax percentage than a typical company employing white collar workers because applicable rates for blue collar industries tend to be higher than comparable rates for white collar industries.
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