Fringe benefits can have substantial tax implications for both S-Corporation employers and employees.
As an S-Corp owner, it’s important to understand what fringe benefits are, how they are taxed, and how to accurately track them. Knowing how to track fringe benefits can help you maximize tax advantages for your business, your employees, and yourself, so today’s article will give you a complete guide for doing just that.
What are fringe benefits?
Fringe benefits, which are also called imputed pay or imputed income, can be any form of compensation that’s provided to employees in addition to their regular salary or wages. There are tons of different types of fringe benefits, such as:
- Cell phone service
- Education assistance
- Health insurance
- Child or dependent care
- Company vehicle use
- Gym membership
- Life insurance
- Lodging
- Paid time off
- Meals
- Retirement plan
- Stock options
Some fringe benefits are taxable, while others may be tax-exempt if they meet specific IRS requirements. Fringe benefits are valuable because they can help attract and retain top talent, boost employee satisfaction, and provide tax advantages.
S-Corp owners can also benefit from their own company’s fringe benefits. However, the important piece to remember here is that shareholder-employees (aka S-Corp owners) who own more than 2% of the company’s stock are treated differently from regular employees when it comes to fringe benefits. For this reason, it’s important that S-Corp owners carefully track and report their fringe benefits to the IRS (more on how to do this in a minute).
Which fringe benefits do S-Corp owners need to track?
For the purpose of fringe benefits, if you are an S-Corp shareholder who owns more than 2% of the company, then you are treated as self-employed rather than as a regular employee. This means that many tax-free fringe benefits that are available to regular employees become taxable for S-Corp owners.
Two common examples of this are:
- Health Insurance Premiums: For S-Corp owners, if the health insurance premium is paid by the business, this must be reported as taxable wages on your W-2.
- Retirement Contributions: For certain types of retirement plans, like SEP IRAs, contributions can still be tax-deferred, but the rules for determining deductible contributions are different for shareholder-employees than for regular employees.
Other fringe benefits that S-Corp owners should keep track of are:
- Group term life insurance premiums
- Health Savings Account (HSA) contributions
- Health Reimbursement Arrangement (HRA) reimbursements
- Meal or lodging
- Moving expenses
- Personal use of business assets
- Transportation expenses like car rental or parking
Which fringe benefits are tax-exempt for S-Corp owners?
There are some fringe benefits that can be tax-exempt for S-Corp owners as well. Some common examples of these benefits (with caveats) are:
- Child or Dependent Care: There is a maximum amount that can be tax-exempt (currently $5,000 annually). Also, the plan must be in writing and there are limits on how much certain S-Corp owners can use.
- Education Assistance: There is a maximum amount per employee and there are limits on how much can be used for S-Corp owners.
- De Minimis Fringe Benefits: The IRS allows infrequent, de minimis benefits to be non-taxed. De minimis benefits are things that the IRS considers so small that it would be “unreasonable or impractical” to keep track of. These can be things like holiday gifts, occasional sporting event tickets, or occasional snacks.
How should S-Corp owners track fringe benefits?
You should track your fringe benefits so the taxable benefits can be included in your “Compensation of officers” amount on Line 7 of your S-Corp’s tax return as well as in Box 1 on your Form W-2.
How you do this is up to you, but I would recommend classifying and tracking each type of fringe benefit in a separate category. At the very least, you’ll want to make sure you’re tracking taxable and non-taxable benefits separately.
For instance, you might have a category for “Owner Compensation,” and within that category, you could track “Wages,” “Health Insurance,” and “HSA.” If the benefit isn’t necessarily something you have a number for, you’ll obviously need to come up with a dollar amount to track the benefit. As an example, if you’re tracking personal use of a vehicle, you’ll calculate the fair market value of typically either the mileage or time you use the vehicle.
If you’re using a payroll software or service like Gusto (that’s the one I use and highly recommend!), then tracking fringe benefits is easily done by adding to your “Custom Benefits” category. These payroll services will also make sure that your benefits are included on all of the appropriate tax forms and pay stubs.
How can an S-Corp owner know which fringe benefits to track?
The tax treatment of fringe benefits, especially for S-Corp owners, can be nuanced and complicated. If you have questions or are just getting started, I recommend that you work with a CPA to help you get a handle on which benefits to track.
Your CPA can also help you come up with a sustainable plan for how you will track fringe benefits going forward. Just as importantly, your CPA can help ensure you’re maximizing the tax advantages of fringe benefits.
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