And it does these things, through payroll withholding, with pre-tax dollars. One key to the successful implementation of a cafeteria plan is properly informing your staff of the plan's positive and negative aspects. You are asking your employees to transfer some of their future earnings into your cafeteria plan. They need to know what they get out of it and what it will cost them. Naturally such a plan allows a small business to offer benefits which would be otherwise unaffordable.
Participants also receive significant tax savings.
Each employee must estimate the costs that he or she will incur during the plan's upcoming year and have the estimated amount paid from wages into the plan. The wages withheld and paid to the plan reduce the employee's taxable earnings for Federal, Social Security and State purposes. This decrease should be compared to the cost of paying for the same services in after-tax dollars. The amount redirected to a plan is excluded from taxable income for federal income, Social Security and Medicare and State tax purposes. The total amount someone can save increases directly with the rate at which the person pays federal tax.