Breaking Down FICA Tax Savings: How Employers Can Reduce Payroll Costs Through a SIMRP
- ewalker223
- Mar 3
- 3 min read
Introduction
For business owners and HR professionals, payroll taxes represent a significant expense. One of the most effective ways to reduce payroll costs is by leveraging FICA tax savings programs like Self-Insured Medical Reimbursement Plans (SIMRP).
In this guide, we’ll break down how FICA tax savings work, how SIMRPs can help employers lower payroll taxes, and provide a step-by-step guide on how to implement these strategies for maximum savings.
Understanding FICA Taxes and Employer Costs
The Federal Insurance Contributions Act (FICA) tax funds Social Security and Medicare. Both employers and employees must pay:
6.2% for Social Security (on wages up to $168,600 in 2024)
1.45% for Medicare (on all wages)
An additional 0.9% for high-income earners (above $200,000 for single filers)
Source: IRS – Understanding Employment Taxes
For businesses with large payrolls, FICA taxes add up quickly. A company with 50 employees earning an average salary of $50,000 pays about $191,250 in employer FICA taxes annually.
However, strategic benefits programs—such as Self-Insured Medical Reimbursement Plans (SIMRP)—can legally reduce taxable wages, leading to substantial payroll tax savings.
What Is a Self-Insured Medical Reimbursement Plan (SIMRP)?
A Self-Insured Medical Reimbursement Plan (SIMRP) is a tax-advantaged program that allows employers to:
Reimburse employees for medical expenses (instead of paying higher taxable wages)
Reduce taxable payroll—lowering FICA tax liabilities
Provide tax-free benefits that improve employee retention
How Does It Work?
Instead of providing a taxable raise, employers allocate a portion of wages toward a medical reimbursement account.
Employees can use these funds tax-free for medical, dental, and vision expenses.
Employers reduce their taxable payroll, leading to FICA tax savings.
Source: IRS – Employer-Provided Health Coverage
Step-by-Step Guide to Implementing a SIMRP for Payroll Tax Savings
Step 1: Assess Your Payroll & Tax Liability
Before implementing a SIMRP, analyze:
Your current payroll structure
Total FICA tax liabilities
Employee interest in medical reimbursement benefits
Many businesses save thousands per employee annually with this approach.
Step 2: Set Up a Formal SIMRP
To qualify for FICA tax savings, the plan must:
Be formalized with a written plan document
Comply with IRS regulations under Section 105
Be offered to all eligible employees
Step 3: Allocate Tax-Free Reimbursement Funds
Determine the amount employees can allocate toward:
Health insurance premiums
Out-of-pocket medical expenses
Dental & vision care
This amount is excluded from taxable wages, reducing both employer and employee tax burdens.
Step 4: Educate Employees & Implement Payroll Adjustments
Communicate plan benefits to employees.
Adjust payroll processing to reflect lower taxable wages.
Work with HR & payroll providers to ensure compliance.
Step 5: Monitor & Optimize Savings
Track FICA tax savings quarterly.
Ensure compliance with IRS and ACA regulations.
Adjust allocations annually to maximize savings.
Real-World Example: How Employers Save with SIMRPs
Case Study: Mid-Sized Company Lowers Payroll Taxes
Company: A healthcare staffing firm with 100 employees
Average Salary: $60,000 per employee
FICA Taxes Before SIMRP: $459,000 annually
Implemented a SIMRP with $5,000 per employee allocated to tax-free reimbursements
FICA Tax Savings: $38,250 annually
By leveraging SIMRP, this employer saved nearly $40,000 per year—while offering valuable health benefits to employees.
Additional Payroll Tax Savings Strategies
1. Section 125 Cafeteria Plans
Employers can reduce taxable wages by allowing employees to pay for benefits pre-tax.🔗 Source: IRS – Section 125 Plans
2. Health Savings Accounts (HSAs) & Flexible Spending Accounts (FSAs)
Contributions to HSAs and FSAs lower FICA tax liability for both employers and employees.
Source: HealthCare.gov – HSA & FSA Benefits
3. Retirement Plan Contributions
Employer 401(k) contributions are not subject to FICA taxes, creating additional tax savings.
Source: IRS – 401(k) Plan Benefits
Conclusion: Leverage Tax-Advantaged Benefits to Reduce Payroll Costs
Employers looking to cut payroll taxes while improving employee benefits should consider Self-Insured Medical Reimbursement Plans (SIMRP) and other FICA tax reduction strategies.
Reduce taxable payroll
Lower FICA tax liability
Enhance employee benefits
By implementing smart tax strategies, businesses can increase profitability while improving employee well-being.
Need Help Setting Up a FICA Tax Savings Plan?
At Worklife Benefit Consultants, we specialize in tax-efficient employee benefit solutions.
Contact us today to learn how we can help you reduce payroll costs while enhancing your benefits strategy!
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