Guide · 5 min

Section 125 Cafeteria Plans: How They Cut Payroll Tax

By Ryan Logan, Founder · Last updated June 23, 2026

The short answer

A Section 125 cafeteria plan lets employees pay for eligible benefits with pre-tax dollars, which lowers their taxable wages and reduces the employer's matching payroll taxes (FICA). Properly designed, it cuts costs on both sides without reducing take-home pay as much as the gross deduction suggests.

Pre-tax benefits, lower taxable wages

Under Section 125, premiums and certain contributions come out of pay before income and payroll taxes are calculated.

Lower taxable wages mean lower employee tax and a lower employer FICA match, a rare win on both sides of the payroll.

Where ONYX's SmartHealth+ fits

ONYX benchmarks SmartHealth+ Section 125 plan designs alongside PEO benefits so the structure is optimized for your workforce.

Plan design matters: the savings depend on participation, plan choices, and correct administration, which a PEO handles.

See exactly where you're overpaying.

Get a free, no-pressure PEO audit. We'll compare your current setup against the top PEOs and show you the savings in 3–5 business days.

Get my free audit→Call 307-429-2473