Tax Questions: re: 125 cafeteria plan / Health insurance plan?

Question

Thank you for your answers in advance.
The employees have health ins. deducted from there gross
wages (before taxes are applied). When filing the 1020 Qrtrly
report it is showing my gross wages (less the health ins) instead
of showing the actual gross wages. My questions is when using
a 125 cafeteria plan, what taxes (ie: Medicare / S.S / UIA state &
federal) are not calculated?

Answer 1

When you have a Sec 125 cafeteria plan, the insurance is deducted from your gross wage, then taxes. For example, let's say your gross pay is $1,000 a week (boy, wouldn't we all want that job?). You've agreed to have $100/week deducted through a Sec 125 cafeteria plan. Now, your taxable gross pay is $900. Based on that adjusted $900 gross, you then will calculate all payroll taxes. Social security and Medicare deduction would be $68.85 ($900 x 7.65%), your federal and state taxes will be based on that same $900 gross, and so on. When you receive your W-2 at the end of the year, your taxable gross will be $46,800 ($900 x 52 weeks), not $52,000 ($1,000 x 52 weeks). It actually works out nicely, taxwise. The only potential downside I see is that it will reduce your social security contributions (that's assuming if any of us ever sees a dime we contributed, anyway).

Hope that helps!

Answer 2

You need to ask the employer, and it that is you, you need to ask your accountant this question.