S Corporation Fringe Benefits after the Recent Tax Reform
by Loyd Stegent on Apr 2, 2018
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.
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:
- Health insurance
- Health reimbursement arrangements (HRAs)
- Health savings accounts (HSAs)
- Disability insurance
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:
- Make the S corporation pay for your insurance premiums, either directly or through reimbursement to you.
- Have the S corporation include the health insurance as wages not subject to FICA on your W-2.
- Deduct (as an individual taxpayer) the cost of the premiums, using the self-employed health insurance deduction on page 1 of your Form 1040.
Six Stinky Fringe Benefits
What makes a fringe benefit stinky?
- The stinky fringe benefit gives your S corporation a tax deduction for the compensation that it includes on your W-2. Effectively, this gives you a zero-tax benefit from the stinky fringe benefit.
- The stinky fringe benefit increases the corporation’s FICA taxes on the compensation it has to add to your W-2.
- The stinky fringe benefit increases your personal FICA taxes because of the compensation added to your W-2.
In summary, stinky fringe benefits—we’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.
- Group term life insurance
- Qualified moving expense reimbursements
- Qualified transportation fringe benefits
- Meals and lodging for the convenience of the employer
- Qualified employee achievement program
- Qualified adoption assistance
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.
- Qualified educational assistance program
- Qualified dependent care assistance program
- Working condition fringe benefits (These currently suffer a tax reform impediment that could make them non-deductible—that’s why they sit in the “maybe, but maybe not” category.)
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:
- De minimis fringe benefits. De minimis fringe benefits include occasional use of the company copy machine, holiday and birthday gifts with a low value, occasional parties and picnics for employees and their guests, and occasional tickets to the theater or sporting events.
- No-additional-cost services. No-additional-cost services are excess capacity services, such as airline, bus, or train tickets; hotel rooms; or telephone services provided free, at a reduced price, or through a cash rebate to employees working in those lines of business.
- Qualified employee discounts. This exclusion applies to a price reduction you give your employee on property or services you offer to customers in the ordinary course of the line of business in which the employee performs substantial services. The employee discounts can be up to 20 percent on services and the gross profit percentage on merchandise.
- On-premises athletic facilities. Your S corporation can exclude the value of an employee’s use of an on-premises gym or other athletic facility from the employee’s wages if substantially all use of the facility during the calendar year is by the corporation’s employees, their spouses, and their dependent children.
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 call us at 713-840-9300.
Copyright 2018, Bradford Tax Institute.