Key Takeaways

  • C corporations can offer substantial tax-deductible fringe benefits, including health insurance, retirement plans, and education assistance.
  • Unlike S corps or LLCs, C corps allow full deduction of employee benefits without shareholders being taxed on them.
  • C corps are ideal for businesses looking to reinvest earnings, attract investment, and provide robust employee benefit packages.
  • Additional benefits of C corp status include perpetual existence, easy transfer of ownership, and no shareholder limit.
  • Some fringe benefits are only tax-exempt for non-owner employees; owner-employees may face stricter IRS scrutiny.C corp fringe benefits often lead to a sizable reduction in corporate tax responsibilities. However, to take advantage of the reductions, you need to know all about them. This guide gives some important information. 

The Way C Corp Taxation Works 

All of the taxable income from a C corporation is able to be written off in the form of salaries and benefits paid to shareholders and employees. So, in many cases, the C corporation works like an S corporation. In theory, the corporation may not pay any taxes because the earnings are all taxed to the owners or shareholders of the business. 

On the other hand, it is often wiser to leave the corporation's earnings in the business instead of paying them all out to the members. However, a benefit of a C corporation is that the employees and members are able to receive fringe benefits from the business. For hundreds of years, business owners have used corporations to limit their liability. 

A disadvantage to corporations is their "double taxation." The term comes from two separate tax levels a corporation's profits are taxed at, the corporate level and the personal level of shareholders. C corporation structure is good for businesses with:

  • A storefront; Products they sell;
  • Large amounts of inventory;
  • A warehouse;
  • And/or a storefront with employees. 

C Corp Taxes

For C corporations, the tax rate is between 18 and 39 percent, depending on the business income ranging between $75,000 and $335,000. Surprisingly, from $335,000 to $10 million, the rate drops down to 34 percent. Then, when taxable income goes over $18,333,333, the tax rate goes back up to 35 percent and stays there.

Up to $75,000 is a good place for businesses with C corporation structure. Over that threshold, the difference in the corporate/individual tax rate shrinks. Even when the corporation's taxable income is higher than $75,000, the corporate tax rate is comparable to the individual rate, especially at a higher annual corporate or individual rate. The tax rate is capped at 39.6 percent for individuals and the highest corporate earners are only taxed at 34 percent.

When the primary focus is to minimize the current tax rate so you keep the most profit in your business for the longest period-of-time, C corporation structure is most likely the best choice. As the taxable income increases both individually and corporately the tax rate becomes harder to compare. 

The corporate rate goes down to 34 percent when income is over $335,000. However, at the personal level, it is more difficult to calculate because much of your income is reduced by deductions and exemptions. There are also other factors that you need to take into account like the individual's marital status, as well as other factors.

In the right situation, you may use a C corporation to alleviate the individual tax burden. C corporations offer even more benefits over other business entities like fringe benefit write-offs, reduced rates of taxes on capital gains on the sale of qualifying small business stocks, easier transfers of stocks, lower tax rates for businesses with under $100,000 in taxable income, and the ability to raise capital through the sale of stocks. 

Small businesses being taxed as a C corporation are deemed favorable. Double taxation is worth considering if you plan to make a lot of distributions of earnings and for the business owners who plan to sell a corporation. So, to elIminate the risk of double-taxation liability, you can liquidate the risk through a sale of stock instead of by selling the company assets. 

Using a C-Corporation to Write Off Fringe Benefits

Fringe benefits are considered noncash compensation or benefits for employees that are not taxable. Section IRC 61 of the tax code says that employees must include the value of the benefits they receive as income unless specifically excluded by a provision under the code. So, for the sake of discussion tax-advantaged fringe benefits are those that a corporation may write-off that are excluded from the taxable income of the employees. 

Most fringe benefits for employees and shareholders of C corporations are fully deductible. However, in most cases partnerships, LLCs, partnerships, and even S corporations may not deduct or write off fringe benefits. So, these deductions are a sole benefit of C corporation status. Health insurance premiums are a major tax-deductible benefit employees and shareholders enjoy that C corporations are able to fully deduct from the corporation's taxable income. 

Strategic Benefits of C Corps Beyond Fringe Deductions

Beyond fringe benefit deductions, the C corp structure offers several strategic advantages for growing businesses:

  • Unlimited shareholders: Unlike S corps, C corporations face no limit on the number or type of shareholders, allowing easier access to capital.
  • Perpetual existence: C corps continue to exist regardless of changes in ownership or management.
  • Stock-based compensation: C corps can issue multiple classes of stock and offer stock options to employees, enhancing talent recruitment and retention.
  • Favorable reinvestment: Since profits can be retained within the corporation, C corps are ideal for businesses looking to reinvest earnings without immediately triggering shareholder taxation.

These structural advantages can complement fringe benefit strategies, making C corporations appealing for long-term business planning.

Owner-Employees and Fringe Benefit Limitations

While C corps enjoy broad tax advantages, not all benefits apply equally to shareholder-employees. The IRS often restricts the tax-free status of certain fringe benefits for individuals who own more than 2% of the company. For example:

  • Discriminatory plans: Benefits must be offered to all employees, not just executives or shareholder-employees, to remain tax-exempt.
  • Key employee rules: Certain benefits like group-term life insurance may be taxable if provided only to top-level employees or officers.

C corps must ensure their benefit plans comply with nondiscrimination requirements to preserve favorable tax treatment.

Additional Tax-Free Fringe Benefits for C Corps

C corporations offer several additional tax-free fringe benefits that go beyond basic health insurance. These benefits can be excluded from employee income and fully deducted by the business, maximizing tax efficiency. Common C corp fringe benefits include:

  • Group-term life insurance (up to $50,000)
  • Dependent care assistance (up to $5,000 per year)
  • Education assistance programs (up to $5,250 per year)
  • Adoption assistance (up to $15,950 for 2023, indexed annually)
  • Company-owned vehicles for business use

These benefits are generally tax-free to employees and deductible to the corporation, provided they meet IRS requirements under sections such as 132 and 127 of the Internal Revenue Code.

Frequently Asked Questions

1. What are the main benefits of a C corp compared to an LLC or S corp? C corps offer more fringe benefit deductions, unlimited shareholders, and retained earnings options, which are not available to LLCs or S corps.

2. Are all fringe benefits offered by C corps tax-free? No. Only benefits that meet IRS qualifications—such as non discriminatory health, education, and insurance plans—are tax-free.

3. Can owner-employees receive tax-free fringe benefits? Yes, but with restrictions. The IRS imposes additional rules for owner-employees, especially if they own more than 2% of the corporation.

4. Is a C corp suitable for small businesses? Yes, especially if the business plans to reinvest earnings, grow through outside investment, or offer competitive employee benefits.

5. What’s the best way to set up a fringe benefit plan? Consult with a qualified attorney or tax professional to ensure the benefit plan complies with IRS nondiscrimination rules and documentation requirements.

It is sometimes difficult to navigate all of the fringe benefits of a C corporation. If you need help with C corp fringe benefits, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.