"S Corp Fringe Benefits: Rules & Tax Tips"

This article provides an overview of fringe benefits taxation for S Corporations, highlighting the types of benefits available, their tax implications, and limitations, particularly for shareholder-employees owning more than 2%. It emphasizes the importance of compliance with IRS rules, proper reporting, and documentation to avoid penalties.


Fringe Benefits Taxation for S Corporations

Below is a summary of the rules and limitations regarding fringe benefits taxation for S Corporations:

Rule/Aspect Description Limitations
Eligibility of Fringe Benefits S Corporations can provide fringe benefits such as health insurance, retirement plans, and group-term life insurance to employees. Benefits may be taxable to shareholders who own more than 2% of the corporation.
Health Insurance Premiums S Corporation can pay health insurance premiums for employees, including shareholder-employees. Premiums paid for shareholder-employees owning >2% are deductible but must be included in their taxable wages.
Group-Term Life Insurance S Corporations can offer group-term life insurance coverage to employees. Shareholders with >2% ownership cannot exclude the value of coverage from their taxable income.
Retirement Plans S Corporations can contribute to retirement plans like 401(k) or SEP IRA for employees. Contributions must meet IRS nondiscrimination rules and limitations on annual contributions.
Meals and Entertainment Meals provided for the convenience of the employer and certain entertainment expenses can be deductible. Deductions are limited to 50% for entertainment expenses; some meals may be fully deductible under specific rules.
Employee Achievement Awards Non-cash awards provided for employee achievement (e.g., safety awards) may be excluded from taxable income. Awards must meet IRS requirements to qualify for exclusion.
Dependent Care Assistance S Corporations can provide dependent care assistance programs to employees. Shareholder-employees owning >2% must include the assistance in taxable wages.
Commuting Benefits Benefits like parking and transit passes may be provided to employees. Shareholders owning >2% cannot exclude these benefits from their taxable wages.
Tax Reporting Requirements S Corporations must report taxable fringe benefits on employees' Form W-2. Failure to report correctly may result in penalties and additional taxes.
IRS Compliance Proper documentation and adherence to IRS rules are required for all fringe benefit programs. Non-compliance can lead to disallowed deductions and penalties.


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