2% or more shareholders of an S-corporation (and family members) are not treated as an employee when it comes to most benefits. Please see the table below for benefits that are taxable and for benefits that are tax-free to a 2% or more shareholder (and family members) of an S-corporation:
|Benefits paid for a 2% or more shareholder (and family members):|
|Taxable Compensation||Tax-free Fringe Benefit|
|Premiums for accident and health insurance||Qualified educatioinal assistance program|
|Group term life insurance||Qualified dependent care assistance program|
|Disability insurance||No-additiional-cost services|
|Medical reimbursement plans||Qualified employee discounts|
|Meals or lodging for the convenience of the employer||Working condition fringe benefits|
|Cafeteria plan||De minimis fringe benefits|
|Qualified transportation fringes||On-premises athletic facilities|
|Qualified employee achievement award||Qualified retirement planning services|
|Qualified adoption assistance program|
|Health savings accounts|
Most of the fringe benefits that are taxable to the 2% or more shareholder (and family members) must be “grossed-up” as though they were actual cash payments, with the following exceptions:
- The accident and health insurances are not subject to social security, medicare, Michigan and Federal unemployment taxes. It is only added to gross pay on the W-2 in the following boxes (The cost of the insurance should also be noted in box 14.):
- 1 – Wages, tips, other compensation
- 16 - State wages, tips, etc.
- 18 – Local wages, tips, etc.
- Employer contributions to the health savings account of a 2% or more shareholder (and family members) are treated as distributions.
- Group term life insurance payments must be “grossed up”, but are not subject to Federal unemployment tax. There is a de minimis benefit for group-term life insurance payable on the death of an employee’s spouse or dependent if the face amount isn’t more than $2,000.
If you have any questions on how this impacts you or your business, please feel free to contact one of our CPAs at (616) 642-9467 or request a complimentary accounting consultation.
Photograph: Rodrigo Roveri