A flexible spending account is a special employee benefit offered by your employer. From this unique account you can set aside money from your paycheck without ever paying tax on it. You then use this tax free money to pay for things you are already buying. Eligible expenses include medical, vision, dental and hearing expenses like prescriptions, doctor office visits, prescription glasses. You can also set aside tax free money for work-related dependent care expenses, child care expenses you incur so you can go to work. Upon new hire eligibility, and then again at the beginning of each plan year, you have the option to elect how much you want to deposit into your FSA. You then make withdrawals for eligible expenses…tax free!
Let’s talk a little more about what tax free really means.
Tax free is easy to understand when put into everyday language. We all earn gross income, but your gross income is not the amount of money you take home. Take-home pay is the amount of money you actually get to put into your personal checking account. Take-home pay is what is left over and can be used to buy groceries, make your car payment, and buy everything else. You spend your entire life buying things from your take-home pay.
It takes about $1.30 of gross income to take home $1.00.
To take home $1.00, you actually have to earn about $1.30 because you have to pay Federal, State, Local and Social Security income taxes before you take any money home.
Pay expenses from your gross income!
Being able to pay for expenses before you pay taxes is known as tax free. What if you could pay for things before you paid Federal, State or Social Security taxes? What if there was a bank account you could use to legally pay for expenses from your gross income…before you had to pay income taxes? What if there was a way you only had to earn $1.00…to pay $1.00?
A bank account this good really exists! It’s known as a Flexible Spending Account and it is approved by the IRS. With an FSA, you only have to earn $1.00 to spend $1.00 because you don’t have to pay income taxes first. You don’t have to earn $1.30 to spend $1.00.