Fringe benefits for shareholder & 2% shareholders of their S corporations

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 lets you treat the cost of fringe benefits as deductible expenses for your S corporation.

The bad news? 

If you’re a more than 2-percent shareholder, you may have to pay additional taxes on some of the benefits. (That’s because the tax code requires your corporation to put selected benefits on your W-2 and subjects these selected benefits to FICA taxes.)

If this all sounds complicated, that’s because it is.

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 (sometimes favorable, 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 suffer the same ugly fate as your fringe benefits.

Contact us to learn more - Amit Chandel (achandel@focuscpa.com) or Crystal Relinski (crystal@focuscpa.com) - Focus CPA Group, Inc., (562 281-1040).

When you work with us we are going to explain the following:

1. Four fringe benefits that are (a) deductible by your S corporation, (b) taxable to you as a shareholder who owns more than 2 percent, and then (c) deductible by you on your personal tax return. You can see that navigating this maze is a little crazy, and you have to do it right to make it work—which, of course, we explain how to do.
2. Six stinky fringe benefits. These benefits are stinky because, first, you get nothing from them because you are a shareholder-employee who owns more than 2 percent and, worse, you pay extra taxes because the “non-benefit to you” goes on your W-2 subject to FICA.
3. Three maybe (but maybe not) fringe benefits. This group of S corporation fringe benefits comes with special rules that can disqualify your eligibility for the benefits.
4. No problem fringe benefits.

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 contact me or Amit Chandel.

Sincerely,

Crystal Relinski

"We help our clients plan to pay less taxes, find more funding for their business endeavors and achieve their personal and family goals, using the existing tax laws”

At Focus CPA Group, Inc., we provide advanced tax planning strategies, advanced cost mitigation strategies, and most importantly we provide best in class resource for your issues via our network of experts