Tax Savings for Employees Premium contributions are automatically deducted from employee salaries before taxes are taken out. Because their taxable income is reduced by the amount they contribute, employees pay less in taxes. Employees see a savings in their FICA, federal, and, in most cases state income taxes. When employees become more aware of how they spend money on benefit items, they also tend to practice more cost-containment, resulting in savings for everyone.  EXAMPLE:  Benefit to an employee With Section 125   Without  Section  125 Monthly gross pay: $1,000 $1,000 Pre-tax child care contribution: 200 0 Pre-tax un-reimbursed medical deduction: 20 0 Taxable gross pay: 780 1,000 Applicable taxes: 127 189 After-tax child care cost: 0 200 After-tax unreimbursed medical cost: 0 20 Net spendable income: 653 591 Increase in monthly spendable income: $62 --- Increase in annual spendable income: $744 ---