Fringe Benefits For Your Family S Corp

Posted on Friday, December 29, 2017

Here's an unusual tax law fact: For federal income tax purposes, the fringe benefit rules that apply to partners also apply to S corporation employees who own (directly or indirectly) more than 2% of the company's stock. Put another way, a more-than-2% shareholder-employee is treated the same as a partner for fringe benefit taxation purposes.

Other Fringe Benefits

When a family S corporation provides a more-than-2% shareholder-employee with a fringe benefit that is not mentioned in the left-hand list (such as season tickets to sporting events), the cost is generally considered additional employee compensation. As such, the cost is deducted by the S corporation and reported as extra taxable income by the recipient.

With that in mind, here is a summary of the tax rules for fringe benefits provided to more-than-2% shareholder-employees of your family S corporation.

Some Fringes are Treated as Taxable Compensation

The costs of providing the following fringes to a more-than-2% shareholder-employee are treated as deductible compensation costs for the corporation and additional taxable income for the shareholder-employee recipient:

Premiums for accident and health insurance coverage for the shareholder-employee, spouse and dependents.
Group term life insurance coverage of up to $50,000.
Disability insurance coverage.
Meals or lodging furnished for the convenience of the S corporation as the employer.
A cafeteria benefit plan.
Qualified transportation fringes.
Qualified adoption assistance program.

Each more-than-2% shareholder-employee can generally deduct 100% of his or her company-paid health insurance premiums on Form 1040. However, the shareholder-employee is not entitled to any personal deductions for the other company-paid fringes listed above.

Some Perks are Tax-Free

When the fringes listed below are provided by the family S corporation as compensation to a more-than-2% shareholder-employee, he or she is treated the same as a "regular" rank-and-file employee. That means the corporation can deduct the costs of providing these fringes and they are federal-income-tax-free to the recipient shareholder-employee (assuming the basic qualification rules are met for each fringe benefit):

Qualified educational assistance program.
Qualified dependent care assistance program.
No‑additional‑cost services.
Qualified employee discounts.
Working condition fringe benefits.
De minimis fringe benefits such as the personal use of a company copy machine and small, non-cash gifts.
On‑premises athletic facilities.

Bottom line: If your family S corporation is not currently providing the tax-free fringe benefits listed above, maybe it should be. Our firm can help your business evaluate and implement its benefit package.

Last but not least, it's important to understand that the special rules for more-than-2% shareholder-employees don't affect the tax treatment of fringes provided by family S corporations to rank-and-file employees. Typically, it's easier to provide fringes to these staff members on a tax-free basis.

Posted in Tax And Accounting Topics For Business

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.