S Corp Fringe Benefits: Everything You Need to Know
S corp fringe benefits refer to additional benefits that supplement the salaries of employees in an S corporation. 3 min read
2. What Are 2-Percent Shareholders?
3. Which Fringe Benefits Are Taxable?
4. Which Fringe Benefits Are Nontaxable?
5. Reporting Taxable Fringe Benefits
6. Understanding Work-Related Fringe Benefits
7. Fringe Benefits Treated as Compensation
S corp fringe benefits refer to additional benefits that supplement the salaries of employees in an S corporation. Unlike a regular corporation, which is subject to double taxation, an S corporation (S corp) allows its income, loss, deductions, and credits to flow through to its shareholders' personal tax returns. In this type of corporation, certain types of fringe benefits are taxable, while others are nontaxable.
Fringe Benefits in an S Corporation
Fringe benefits are usually excluded from the taxable income of an employee in an S corporation. Nonetheless, shareholders who own over 2 percent of the corporation's stock get special treatment. Instead of being taxed at the corporate level, an S corporation passes its income through to its shareholders. As such, it is subject to taxation rules that are different from those that apply to other types of business entity.
What Are 2-Percent Shareholders?
Designated as owners of an S corporation, 2-percent shareholders are not allowed to participate in Section 125 plans. They are regarded as partners and required to comply with additional taxation and reporting requirements. The additional regulations are applicable to shareholders with 2 or more percent of the outstanding stock of the company or 2 percent of the voting rights at any point within the tax year.
Stock ownership is subject to family attribution rules, meaning a shareholder's parents, grandparents, spouse, children, and grandchildren are considered indirect owners of the same amount of stock.
Which Fringe Benefits Are Taxable?
Two-percent shareholders in an S corporation are required to pay taxes on the following fringe benefits:
- Premiums for group-term life insurance coverage worth up to $50,000.
- Premiums for health, accident, disability, and long-term care insurance.
- Meals and lodging provided for the employer's convenience.
- Reimbursements of transportation and moving expenses.
- Adoption assistance programs.
- Employee achievement awards with monetary values.
Third-party payroll service providers will usually report taxable fringe benefits on W-2 forms on behalf of the shareholders.
Which Fringe Benefits Are Nontaxable?
There are certain kinds of fringe benefits that are nontaxable, even for 2-percent shareholders. They include:
- Cellphones used for business purposes
- On-site meals for employees
- Employee discounts
- Use of company-owned vehicles for business purposes
- Retirement planning assistance from an employer-sponsored program
- Use of a health club provided by the employer
- De minimis benefits such as company parties and holiday gifts.
Reporting Taxable Fringe Benefits
As an S corporation owner, you must report taxable fringe benefits as normal income on your individual tax return. The company may report those fringe benefits on Form 1120S as deductible salaries and wages. If you are working as an officer in an S corporation, you are required to report your fringe benefits as officer compensation.
The fringe benefits you provide for your employees are subject to federal withholding, state withholding, Federal Insurance Contribution Act (FICA) taxes, and Federal Unemployment Tax Act (FUTA) taxes. Premiums for health and accident insurance are an exception. Since they are not regarded as wages, these fringe benefits are only subject to federal and state withholding.
Understanding Work-Related Fringe Benefits
Work-related fringe benefits refer to benefits that are not included in the income of an employee under Section 132. Such benefits are also called statutory fringe benefits or Section 132 fringe benefits. Two-percent shareholders of an S corporation can provide all work-related fringe benefits on a tax-favored basis, except for eligible transportation fringe benefits and reimbursements of moving expenses.
Qualified employee discounts and no-additional-cost services must be provided without discrimination. Qualified employee discounts are only excluded from income if they are discounts on products or services within the corporation's line of business where the employee works. For instance, if an S corp produces electrical components and runs a retail department store, an employee working in the department store does not qualify for tax-exempt discounts on electrical components.
Fringe Benefits Treated as Compensation
Revenue Ruling 91-26 and IRS Announcement 92-16 provide a partial clarification of the treatment of fringe benefit while directly addressing only premiums on health and accident insurance.
Revenue Ruling 91-26 states premiums on health and accident insurance paid on behalf of 2-percent shareholders must be reported as compensation paid to them. As such, the premiums will not be deducted on IRS Form 1120S. According to IRS Announcement 92-16, if the deemed wages are paid in accordance with a plan under Section 3121(a), they are not subject to self-employment and FUTA taxes.
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