Unlock Savings with a Section 125 Credit for Your Small Business
Are You Missing Out on a Valuable Tax Break with Your Health Insurance?
In the complex world of health insurance, there’s a little known tax break that can result in thousands of dollars saved each year.
If you offer company-sponsored health insurance, you are eligible—but are you actually receiving the full benefit? Unfortunately, many payroll vendors aren’t transparent about the credit, often keeping it for themselves.
In this post, we’ll break down what this tax break is, how to calculate it, and the steps you should take to ensure you're not leaving money on the table.
What is Section 125?
Under Section 125 of the IRS tax code, when employers make pre-tax contributions to their employees’ health insurance, those contributions are exempt from taxes. This means the employee’s portion of their medical, vision, and dental premiums reduces taxable wages, lowering the employer’s tax liability.
Ideally, your payroll processor should pass these tax savings directly to you. However, due to the lack of transparency in how the credit operates, many vendors instead retain the savings for themselves—costing businesses thousands of dollars each year, depending on company size and contribution structure.
How Much Could You Be Losing?
To estimate your potential savings, follow this simple calculation:
- Take the total annual employee-paid portion of medical, vision, and dental premiums.
- Multiply that amount by 7.65% (the combined Social Security and Medicare tax rate).
For example, if your total annual benefits spend is $300,000, and your company covers 60% of employee premiums, that leaves $180,000 in employee-paid premiums. Applying the 7.65% tax savings, you should be receiving back $13,770 annually in the form of credit against future employer contributions to employee health insurance plans.
Are You Actually Receiving This Tax Credit?
The best place to start is by consulting your accountant. They can help you determine whether your payroll or PEO provider is passing these savings along to your business.
Our team has insight into which specific payroll processors operate transparently and which ones withhold these savings. If you’d like to ensure you're getting every dollar you’re entitled to, feel free to reach out—we’d be happy to help.
