Skip the raise? Some employers are boosting health benefits instead to save on payroll taxes in 2026, and workers are taking notice now

For some employers, putting more money into health benefits can be cheaper than giving the same amount as taxable wages. The reason is simple: qualifying employer health benefits generally aren't treated as wages for Social Security and Medicare payroll taxes.

That matters more in 2026 because employers are dealing with higher health-care costs while also watching labor expenses closely. Mercer says employers expected health benefit costs per employee to rise 6.5% in 2026, even after planned changes to control spending. Without those changes, the expected increase was about 9%.

Employers swap wage raises for health perks

A normal raise is wages. That means the employer generally owes its share of Social Security and Medicare taxes on those additional earnings. For 2026, the employer Social Security rate is 6.2%, while Medicare is another 1.45%. Together, that's 7.65% on most wages, before considering other employment-related costs. The Social Security wage base is $184,500 for 2026, while Medicare has no wage cap. Health insurance works differently.


That can create a meaningful difference in a large payroll. Consider a simplified example. If an employer adds $5,000 to an employee's taxable salary, the employer's Social Security and Medicare liability could rise by roughly $382.50, assuming the wages are subject to both taxes. A $5,000 employer health-benefit contribution doesn't generally create the same payroll-tax bill.

The trade-off is easier to understand when health insurance costs are put next to wages. KFF's 2025 employer health benefits survey found that the average annual premium for employer-sponsored family coverage reached $26,993. Workers paid an average of $6,850 of that amount, leaving employers responsible for a substantial share of the premium. Family premiums were up 6% from the previous year.

That means an employer considering compensation isn't looking only at salary anymore. Health coverage can represent thousands of dollars in annual compensation for one worker.

Health benefits have to follow the applicable tax rules and plan requirements. A Section 125 cafeteria plan, for example, can allow eligible employees to pay their share of health premiums on a pre-tax basis, reducing taxable income and payroll taxes for both sides.

What workers should look at before accepting the trade

A bigger health contribution can look like a raise on paper, but the two aren't interchangeable. A $3,000 salary increase becomes taxable wages. A $3,000 increase in an employer's health contribution is generally directed toward coverage instead.

That difference affects flexibility. Cash can go toward rent, savings, debt payments or anything else. Health benefits can't. Workers should also look beyond the headline dollar amount. A richer employer contribution could come with a higher deductible, narrower provider network or other changes to the plan.