How Your Business Can Save on Taxes - Using a Tax Law From 1978

Right about now, business owners are gearing up for the Christmas selling season. Granted most consumers aren't thinking about that yet, but business owners have a tendency to think ahead. So in the spirit of thinking ahead, as a business owner, would you like to immediately save money on your taxes?

Yes, April 15 is a long way away, but think about it, if you could take action now, to lower your tax burden, wouldn't you want to at least consider it?

There is a very underutilized section of the tax code that was introduced by the IRS in 1978, that can still save business owners money right now. It's completely legal and provides tax relief to small business owners.

SECTION 125:

Section 125 of the US Tax Code was introduced in 1978. Called the Cafeteria plan, it basically, it allows businesses and specifically business owners to shift the benefits payouts for things like health insurance, voluntary insurance and dependent care costs to pre-tax dollars instead of post tax dollars.

What this means, consider an employee with $1000 in gross pay per week. In most small business situations, the employee is paying taxes on the $1000 and so are you, the employer. You, the employer are paying FICA taxes of 7.65%. Now consider the employee is then having money taken out for health care costs and other deductions they have selected. Let's assume when all is said and done, the employee takes home $693, of the $1,000.

Now, under Section 125 of the tax code, the employer can shift the taxes to pre-tax dollars. This benefits both you the employer and the employee. In this scenario, you shift the costs of benefits to pre-tax dollars. If the benefits overall cost $200, then the employee is only taxed on the $800 that remains, rather than the initial $1000. This immediately lowers the FICA taxes to $61.20 from $76.50. It's an immediate savings of $15.30 for the time period. Over a 52 week period, it's a tax savings of almost $800.

This is just one way in which the tax law benefits the employer. No only are you paying less FICA taxes, you may also be able to save money on workman's compensation as well. That regulation depends on what state you are in.

So, If you had twenty employees at this level, the savings alone is close to $16,000 in your bottom line. Consider for a second what an extra $16,000 could do to help your bottom line and get starting researching now.