| So what in the world is a Cafeteria 125 Plan | | | | employee (which is ultimately good for you), but |
| anyway? If you don't know what it is, you don't | | | | what about your overall payroll numbers? Let's do |
| have it in place. And you might be needlessly | | | | some more numbers: |
| throwing money out the proverbial window by | | | | Not pre-taxed |
| not having it in place. The plan is this: it allows you | | | | $100000 gross payroll |
| to pre-tax such payroll deductions as insurance | | | | -25000 taxation (25%) |
| premiums, savings account contributions, 401k | | | | $75000 net payroll |
| contributions, etc. Ok. what does pre-tax mean? | | | | -$10000 insurance premium |
| Pre-taxing a deduction is not as complicated as it | | | | $65000 actual net payroll |
| sounds. There is your gross pay and your net | | | | Pre-taxed |
| pay. Your gross pay is your payment for work | | | | $100000 gross payroll |
| done based on your hourly wage or salary for | | | | -$10000 insurance premiums |
| that pay period. Your net pay is what you actually | | | | $90000 gross payroll after pre-tax deductions |
| get after the gross pay is taxed on a local, state | | | | -$22500 taxation (25%) |
| and federal level. Pre-taxing is simply reducing an | | | | $67500 actual net payroll |
| employee's gross pay with a specified deduction | | | | As you can see, in this example of a payroll of |
| or deductions prior to governmental taxing. Doing | | | | $100,000, you get to deduct more for payroll |
| this lessens the amount of tax paid to the | | | | (reducing your capital gains taxes) and you save |
| government. Here is an example: | | | | $2500 in payroll taxes. All of this for simply putting |
| Not pre-taxed | | | | in a cafeteria 125 plan! Starting to make sense |
| $1000 gross pay | | | | now? |
| -250 taxation (25%) | | | | Some supplemental health insurance companies will |
| $750 net pay | | | | actually put in place a pre-tax plan for premiums |
| -$100 insurance premium | | | | at no extra cost, allowing you to save some |
| $650 take home pay | | | | money, as illustrated above. And by adding |
| Pre-taxed | | | | supplements, you are allowed greater flexibility in |
| $1000 gross pay | | | | making future healthcare decisions. Medical |
| -$100 insurance premiums | | | | supplements have been around for several |
| $900 gross pay after pre-tax deductions | | | | decades, though few companies offer it to their |
| -$225 taxation (25%) | | | | employees. These plans range from typical |
| $675 take home pay | | | | supplements like vision and dental to more specific |
| So you just saved your employee $25 by simply | | | | programs like accident and cancer plans. |
| adding a cafeteria plan. Ok. That's good for the | | | | |