FICA Tax Savings for Franchise Owners: A Complete Guide

Q: My employees can't afford to have money taken from their paychecks for Section 125. Is this true?

Employees actually see MORE money in their paychecks, not less. The pre-tax nature of the contributions means they save on income taxes and FICA taxes. Most employees see a net increase in take-home pay of around 4%.

Published January 18, 2026 | 10 min read

As a franchise owner, you understand that every dollar counts. Between franchise fees, inventory costs, labor expenses, and taxes, margins can be tight. But what if you could reduce your payroll taxes by tens of thousands of dollars every year—without cutting employee hours or benefits?

That's exactly what FICA tax savings through Section 125 cafeteria plans can deliver. In this guide, we'll show you how franchise owners across the country are leveraging this IRS-approved strategy to keep more money in their businesses.

Understanding FICA Taxes: The Basics

FICA (Federal Insurance Contributions Act) taxes fund Social Security and Medicare. As an employer, you're responsible for:

Social Security tax: 6.2% on wages up to $168,600 (2024 limit)
Medicare tax: 1.45% on all wages (no cap)
Total employer FICA: 7.65% of every employee's taxable wages

For franchise owners with multiple locations and dozens or hundreds of employees, this adds up fast. A franchisee with 200 employees paying an average of $30,000 annually faces over $450,000 in FICA taxes alone.

How Section 125 Plans Reduce FICA Taxes

Section 125 cafeteria plans legally reduce the wages subject to FICA taxation. Here's how:

Employees elect to receive qualified benefits (like hospital indemnity insurance) instead of taxable wages
These benefits are paid with pre-tax dollars through salary reduction
The salary reduction amount is not subject to FICA taxes
Both employer and employee save on payroll taxes

The result: For every dollar redirected to qualified benefits, you save 7.65 cents in FICA taxes. Scale that across hundreds of employees and thousands of dollars per employee, and the savings are substantial.

Real Numbers: FICA Savings for Franchise Owners

Let's look at realistic scenarios for different franchise sizes:

Small Franchise: 50 Employees (Single Location)

Participating employees (80%): 40
Average annual pre-tax contribution: $2,600
Total pre-tax contributions: $104,000
Annual FICA savings: $7,956

Medium Franchise: 150 Employees (3-5 Locations)

Participating employees (80%): 120
Average annual pre-tax contribution: $2,600
Total pre-tax contributions: $312,000
Annual FICA savings: $23,868

Large Franchise: 500 Employees (10+ Locations)

Participating employees (80%): 400
Average annual pre-tax contribution: $2,600
Total pre-tax contributions: $1,040,000
Annual FICA savings: $79,560

These figures represent FICA savings only. Additional savings come from FUTA and state unemployment taxes.

Why Franchises Are Ideal for Section 125 Plans

Franchise businesses have unique characteristics that make Section 125 plans especially effective:

High Employee Volume

Franchises typically have large workforces, which means more employees participating in the plan and greater aggregate savings. The fixed administrative costs are spread across more participants, improving ROI.

Standardized Operations

Franchise systems are built on standardization. Implementing a consistent benefits program across all locations is natural and straightforward.

Hourly Workforce

Many franchise employees work hourly positions in retail, food service, or hospitality. These workers often have limited access to benefits and highly value the supplemental coverage and increased take-home pay that Section 125 plans provide.

Multi-Location Scalability

Once you implement a Section 125 plan at one location, rolling it out to additional locations is simple. The same plan documents, enrollment processes, and administration can be replicated.

Industries Where We See the Biggest Impact

While Section 125 plans work for any business, certain franchise industries see exceptional results:

Quick Service Restaurants (QSR)

Fast food and fast casual franchises often have 20-50 employees per location with high turnover. Section 125 plans help with retention while generating significant tax savings.

Hospitality and Hotels

Hotel franchises with housekeeping, front desk, and maintenance staff benefit from the combination of payroll tax savings and improved employee benefits.

Fitness and Wellness

Gym and fitness franchises with trainers, front desk staff, and maintenance personnel find that supplemental health benefits align perfectly with their wellness-focused brand.

Home Services

Cleaning, lawn care, pest control, and other home service franchises often have large field workforces that benefit from hospital indemnity coverage.

Retail

Retail franchises with multiple locations and seasonal staffing fluctuations can implement Section 125 plans that flex with their workforce.

Beyond FICA: Additional Tax Savings

While FICA savings are the headline, franchise owners also save on:

FUTA (Federal Unemployment Tax)

Employers pay 6% on the first $7,000 of each employee's wages (reduced to 0.6% with state unemployment tax credits). Pre-tax contributions reduce FUTA-taxable wages.

SUTA (State Unemployment Tax)

State unemployment tax rates vary but can range from 1% to 5%+ depending on your experience rating and state. Pre-tax contributions reduce your SUTA burden as well.

Workers' Compensation

In most states, workers' comp premiums are calculated based on payroll. Lower taxable payroll can mean lower workers' comp costs.

Implementation for Multi-Location Franchises

Implementing a Section 125 plan across multiple franchise locations requires coordination, but it's simpler than you might think:

Phase 1: Planning (Week 1-2)

Assess total employee count across all locations
Calculate projected savings
Coordinate with location managers

Phase 2: Documentation (Week 3-4)

Create plan documents covering all locations
Ensure compliance with state-specific regulations
Prepare enrollment materials

Phase 3: Rollout (Week 5-8)

Conduct employee information sessions (in-person or virtual)
Process enrollments
Integrate with payroll systems

Phase 4: Ongoing Administration

Monthly payroll processing
New hire enrollments
Annual compliance testing
Employee support

Common Concerns from Franchise Owners

"My employees can't afford to have money taken from their paychecks."

Here's the key: employees actually see MORE money in their paychecks, not less. The pre-tax nature of the contributions means they save on income taxes and FICA taxes. Most employees see a net increase in take-home pay of around 4%.

"I don't want to deal with more administrative complexity."

We handle all administration. Your only responsibility is running payroll as usual—we take care of enrollment, claims, compliance, and reporting.

"What if employees don't want to participate?"

Participation is voluntary, but we typically see 80%+ enrollment because employees genuinely benefit. Those who don't participate simply continue with their current pay structure.

"Is this really IRS-approved?"

Absolutely. Section 125 cafeteria plans have been part of the Internal Revenue Code since 1978. Millions of employees at thousands of companies participate in these plans.

Getting Started: What Franchise Owners Need

Ready to explore FICA tax savings for your franchise? Here's what we need to get started:

Total employee count across all locations
Payroll frequency (weekly, bi-weekly, semi-monthly, monthly)
Current benefits offered (if any)
Contact information for a brief consultation

We'll provide a detailed savings projection specific to your franchise within 24-48 hours. If you decide to move forward, implementation typically takes 30-60 days.