Fringe benefits are usually a good thing—but there’s a catch when you own more than 2 percent of an S corporation.
The good news? Federal tax law allows the cost of these fringes as deductible expenses for your S corporation.
The bad news? You, the shareholder-employee who owns more than 2 percent, may suffer additional taxes on some of the benefits because the tax code requires your corporation to put selected benefits on your W-2 The outcome is sometimes favorable and sometimes not.
Here’s the ugly rule that causes this problem. Under the federal income and employment tax rules for the most popular fringe benefits, tax law treats the more than 2 percent shareholder-employee of an S corporation as a partner.
And—we know you are just waiting for this—more bad news: related-party stock attribution rules apply to the S corporation.
Under these rules, tax law says that your spouse, parents, children, and grandchildren own the same stock you own—and if you employ them in your S corporation, their fringe benefits generally suffer the same ugly fate as your fringe benefits.
Four Beneficial but Somewhat Crazy Fringe Benefits
The following four fringe benefits work their way through a tax code maze to eventually produce a personal benefit to you, the shareholder-employee who owns more than 2 percent:
As an example of the tax code maze, here is what you, the more than 2 percent shareholder-employee, must do to get any tax benefit whatsoever from health insurance:
Six Stinky Fringe Benefits
What makes a fringe benefit stinky?
In summary, stinky fringe benefits—I’ve listed them below—are absolutely NO benefit to you, and they increase both your and your corporation’s FICA taxes. That’s really stinky.
Three Maybe (but Maybe Not) Fringe Benefits
The three fringe benefits listed below face special tax code disallowance rules that often take these benefits away from the S corporation shareholder-employee who owns more than 2 percent:
Four No-Problem Fringe Benefits
Your S corporation can provide you, as a shareholder-employee who owns more than 2 percent, and its other employees with the following fringe benefits, which are tax-free to the employees and deductible by the S corporation:
As you know, you need to pay attention when it comes to the fringe benefits that your S corporation is going to offer you, a shareholder-employee who owns more than 2 percent. And of course, you have to pay attention when your S corporation offers fringe benefits to rank-and-file employees, too.
If you would like us to review your fringe benefits, please don’t hesitate to reach out to your trusted team here at Luster Tax Consulting.
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