[fname], I am sending this email for 2 important reasons.
you did not listen to my webinar last week on Obamacare, (click
here for the replay), I covered a new wrinkle in Obamacare which does
not allow employers who are not mandated by Obamacare, (have less than 50
full time employees), to reimburse employees in any way for purchasing their
own health insurance with extra reimbursement checks.
Any reimbursement to employees for expenses including buying health
insurance must be done through payroll. The reimbursement does not
increase the employees W-2 wages but instead adds to the net check as
Thanks for taking the time to read the above, listen to my
webinar if you
Because of the importance of the information in this article below on
Corporations and Fringe Benefit Realization.
Tax Tips for the S
Corporation's Fringe Benefit Realization
Your S corporation may not give you the tax-free fringe benefits you desire.
In the good old days, the S corporation avoided double taxation, reduced
self-employment taxes, and also gave you all the fringe benefits.
The good old days are long gone (since 1982).
Beginning in 2011 if an S-corporation was your entity of choice, you give up
some fringe benefits for this entity choice.
Two Questions to Ask
How much does this giveback cost you in after-tax dollars? That’s a question
that you need to consider.
In this article, we give you the single best route to finding this answer.
Second, what is the best way for you and the S corporation to deal with this
giveback of fringe benefits? That depends. This article gives you a clear
analysis of the three possible giveback methods.
The 2 Percent
The law taxes any fringe benefits received by employees who own a greater
than 2 percent interest in an S corporation as if they were partners in a
partnership. Tax law limits the fringe benefits that are available to
Thus, the S corporation can have two types of employees:
1. The more than 2 percent owner-employee (the partner for fringe benefit
2. The 2 percent or less regular employee
Fringe Benefits Lost
The S corporation may not provide the more than 2 percent owner-employee
with the following tax-free fringe benefits:
- Amounts paid to an accident or health plan
- Group term life insurance coverage (which is excludable on a regular
employee up to the first $50,000 of coverage)
- Meals or lodging furnished for the employer’s convenience
The following fringe benefits are available to a partner in a partnership
and, therefore, available to the more than 2 percent owner employee:
- Employee achievement awards
- Qualified group legal services plans
- Educational assistance programs
- Dependent care assistance programs
- No-additional-cost services
- Qualified employee discounts
- Working condition fringe benefits
- De minimis fringe benefits
- On-premises athletic facilities
- Medical savings accounts
Three Strategies for
the Owner’s Disallowed Fringe Benefits
You and your S corporation have three tax choices for treating the
disallowed fringe benefits:
- W-2 compensation to the owner-employee
- Distribution to the owner-employee
- Reimbursement by the owner-employee to the S corporation
Choice 1: W-2
The S corporation may treat the disallowed fringe benefit as W-2
compensation to the owner-employee. In this case,
- the corporation deducts the fringe benefit as compensation to the
- the owner-employee receives the fringe benefit as taxable compensation.
For sure, this is what you want to do with health insurance or an S
corporation Section 105 medical plan.
W-2 is the only way for health insurance. As the article above
explains, the S corporation owner employee needs the W-2 recognition of the
corporate-paid health insurance to realize a deduction on his or her
personal tax return. In effect, no W-2, no Form 1040 page 1 deduction for
the health insurance.
The good news is that the W-2 recognition of the S corporation’s payment of
the owner-employee’s health insurance is not subject to FICA or Medicare.
When to avoid the W-2. W-2 recognition of the disallowed fringe
benefits other than medical is subject to FICA and Medicare taxes.14
Accordingly, limit your W-2 recognition to medical. How do you do that?
Use either choice 2 or 3 below to keep the other tainted (and therefore
taxable) fringe benefits off the W-2.
In this choice, the S corporation makes disallowed fringe benefits a
distribution by the corporation to the S corporation owner-employee.
The word "distribution" in this context is pretty much the same as dividend
in the C corporation context in that the distribution is coming from income
on which the S corporation owner has already paid the taxes.
With this approach,
- the S corporation has no tax deduction, and
- the owner-employee has no taxable income.
Thus, the disallowance of the fringe benefit does not trigger any additional
loss because of payroll taxes.
Remember, you do not want to use this approach with the health insurance
fringe benefit. Without the W-2 for medical, the owner of the S
corporation loses the Form 1040 page 1 medical deduction on his or her
personal tax return.
With the one-owner S corporation, there are no complications in using the
distribution strategy for disallowed fringe benefits other than medical.
However, should the S corporation have multiple owners, the S corporation
distributions need to avoid preferential dividend treatment that could
create a second class of stock and terminate the S corporation’s election.
Choice 3: Reimburse
the S Corporation
In choice 3, the owner-employee reimburses the corporation for the cost of
the fringe benefit. With the reimbursement, the owner-employee is paying for
the fringe benefit personally. This does not work for health
However, like the distribution method above, the reimbursement method avoids
FICA and Medicare taxes and works perfectly for disallowed fringe benefits
other than medical.
Further, the S corporation owner who does not have previously taxed earnings
in the S corporation adequate for a distribution should consider this
If you are using the reimbursement method, you need to ensure settlement by
December 31 or record the outstanding amount as a loan receivable by the
corporation from the owner-employee.
The one-owner S corporation often plays with fire with its owner-employee
advance accounts and loan amounts. Thus, you should strongly consider making
the reimbursement in a timely manner before the corporation closes its year.
In other words, avoid advances and loans.
Before worrying about how you and your S corporation are going to deal with
fringe benefits, examine the question of the S corporation itself. Is this
the business entity that is putting cash in your pocket?
Once you decide that the S corporation is the best choice for you, then
consider how to treat the disallowed fringe benefits. Keep these points in
1. You absolutely, positively want to have the S corporation report the
heath insurance on a W-2 to the owner employee.
2. The health insurance on the W-2 is exempt from FICA and Medicare.
3. Group life, meals and lodging, and cafeteria plan benefits reported on
the W-2 are not exempt from FICA and Medicare.
4. You can save FICA, Medicare, and other payroll taxes on the disallowed
group life, meals and lodging, and cafeteria plan disallowed benefits by
using either the distribution or the reimbursement method.
If you have any questions please feel free to call me here at the office.
Of course with something this new don’t expect us to have all the answers.
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