Special Fringe Benefit Reporting Rules for S-Corporations
A Fringe Benefit is a form of payment for the performance of services. For example, you provide an employee with a fringe benefit when you offer to pay a portion of their health insurance premiums. (This section appears as part of Redpath’s 2018 Bottomline Newsletter as well.)
Any fringe benefit you provide is taxable and must be included in income unless the law excludes it.
There are many cases where the law excludes the employer paid fringe benefit from income for regular employees. However, this exclusion does not always apply to greater than 2% shareholders of an S-corporation and any individual related to that owner through attribution rules (including spouse, children, grandchildren, and parents).
The following benefits, if paid by the company on behalf of 2% owners, are considered taxable compensation.
Not subject to Social Security and Medicare*:
- Health Insurance
- Dental Insurance
- Disability Insurance**
- Employer HSA Contributions
Subject to Social Security and Medicare:
- Section 119, Excluded meals and lodging
- Section 79, Group term life insurance
- Section 120, Group Legal Services
- Personal Use of employer-provided vehicles
- Non-Group Life Insurance
All of the above benefits are subject to applicable Federal and state withholding taxes. See individual state guidelines for more information. Important Note: Partners and 2% shareholders (including related individuals) are prohibited from participating in cafeteria plans. This includes health insurance and HSA deductions done through payroll. The benefit, if set up as a deduction, should be set up after tax.
* Premiums must be pursuant to a company plan (a plan or system for employees or classes of employees).
** Insurance premiums subject to tax for Federal and State income purposes to avoid taxation of benefits are also subject to Social Security and Medicare Tax.
If you have further questions as an S-corp about fringe benefit reporting or have other areas of concern when it comes to your planning, reach out to Redpath and Company’s Heather Larson, CPP at firstname.lastname@example.org or (651) 255-9324.