Fringe benefits can provide substantial tax advantages for business owners, but their deductibility and tax treatment vary depending on the business entity type. While C corporations offer the most flexibility in providing tax-free benefits, S corporation and LLC/partnership owners often face unique tax reporting requirements. Below is a breakdown of 20 common fringe benefits, including key considerations and nuances for each business structure.
Health Insurance Premiums
Health insurance premiums are one of the most common and valuable fringe benefits. C corporations can fully deduct premiums as a business expense, and the coverage remains tax-free to the owner. However, S corporation and LLC/partnership owners must follow additional reporting steps to claim a deduction. Importantly, premiums paid by an S corporation or LLC/partnership for a >2% owner must be included in taxable income, but the owner can deduct them on their personal return.
C Corp: Deductible to the company, tax-free to the owner, and not subject to Social Security or Medicare taxes.
S Corp: Deductible by the company but added to wages. The owner can deduct the amount on their personal tax return. Exempt from Social Security and Medicare taxes.
LLC/Partnership: Deducted by the company, added to the K-1, then deducted by the owner on their return. Exempt from Social Security and Medicare taxes.
Health Savings Accounts (HSAs) & Flexible Spending Accounts (FSAs)
HSAs and FSAs provide pre-tax benefits for medical expenses, but their treatment differs by entity type. C corporations can offer employer-funded contributions tax-free, but S corporation and LLC/partnership owners generally must make HSA contributions personally rather than through payroll deductions.
C Corp: Employer contributions are deductible and tax-free. Employee contributions are pre-tax.
S Corp: Employer contributions are deductible but must be included in wages. Employee contributions are pre-tax.
LLC/Partnership: Employer contributions are deducted by the company, added to the K-1, then deducted by the owner. Employee contributions are pre-tax.
Dependent Care Assistance
Employers can provide up to $5,000 in tax-free dependent care benefits for qualifying expenses. However, S corporation and LLC/partnership owners must include the benefit in taxable income before deducting it on their personal tax return.
C Corp: Deductible to the company, tax-free to the owner up to $5,000.
S Corp: Deductible to the company but must be included in wages. The owner can deduct the amount on their personal return.
LLC/Partnership: Deducted by the company, added to the K-1, then deducted by the owner on their return.
Group Term Life Insurance
The IRS allows companies to provide up to $50,000 in tax-free group term life insurance coverage. Amounts above this threshold are taxable to the recipient. For S corporations and LLCs, premiums must be reported as wages or on the K-1 for owners.
C Corp: Deductible to the company, tax-free to the owner up to $50,000. Amounts above $50,000 are taxable.
S Corp: Deductible to the company, but any amount above $50,000 is included in wages.
LLC/Partnership: Deducted by the company, added to the K-1, and any amount above $50,000 is taxable.
Disability Insurance
The taxability of disability insurance benefits depends on who pays for the policy. If the employer pays the premiums, any benefits received by the owner are taxable.
C Corp: Deductible to the company, but if the company pays the premium, any benefits received by the owner are taxable.
S Corp: Deductible to the company, and benefits are taxable to the owner if employer-paid.
LLC/Partnership: Deductible to the company, added to the K-1, and benefits are taxable if employer-paid.
Retirement Plan Contributions
Employer contributions to retirement plans (e.g., 401(k), SEP IRA) are tax-deductible and provide tax-deferred growth. However, partners and S corporation owners may need to take distributions through their K-1.
C Corp: Employer contributions are deductible and tax-deferred for the owner.
S Corp: Employer contributions are deductible and tax-deferred for the owner.
LLC/Partnership: Employer contributions are deducted by the company, allocated via the K-1, and tax-deferred for the owner.
Education Assistance
Employers can provide up to $5,250 in tax-free education benefits for qualifying expenses. For S corporations and LLCs, owners must include this amount in taxable wages before deducting it on their return.
C Corp: Deductible to the company, tax-free to the owner up to $5,250.
S Corp: Deductible to the company, but the amount is included in wages, then deducted on the owner's return.
LLC/Partnership: Deducted by the company, added to the K-1, then deducted on the owner's return.
Adoption Assistance
Employers can reimburse adoption-related expenses on a tax-free basis up to the IRS limit ($16,810 for 2024). While C corporations can fully deduct this benefit, S corporation and LLC/partnership owners must report the assistance as taxable income before claiming a personal deduction.
C Corp: Deductible to the company, tax-free to the owner up to IRS limits.
S Corp: Deductible to the company, included in wages, then deducted on the owner's return.
LLC/Partnership: Deducted by the company, added to the K-1, then deducted on the owner's return.
Cafeteria Plans
Section 125 cafeteria plans allow employees to pay for benefits like health insurance, HSAs, and dependent care on a pre-tax basis. Unfortunately, S corporation and LLC/partnership owners are not eligible to participate in these plans for their own benefits.
C Corp: Deductible to the company, tax-free to the owner if structured properly.
S Corp: Owners cannot participate in cafeteria plans.
LLC/Partnership: Owners cannot participate in cafeteria plans.
De Minimis Benefits
Small perks such as snacks, holiday gifts, and occasional use of company equipment are deductible for the company and tax-free for the owner, provided they meet IRS de minimis thresholds.
C Corp: Deductible to the company, tax-free to the owner.
S Corp: Deductible to the company, tax-free to the owner.
LLC/Partnership: Deductible to the company, tax-free to the owner.
Company Car (Business Use)
If a company provides a vehicle for business use, the business portion is tax-free. However, personal use must be reported as taxable income.
C Corp: Deductible to the company, tax-free for business use. Personal use is taxable.
S Corp: Deductible to the company, personal use must be included in wages.
LLC/Partnership: Deducted by the company, personal use must be included on the K-1.
Business Travel Reimbursements
Employers can reimburse business-related travel expenses tax-free if an accountable plan is followed.
C Corp: Deductible to the company, tax-free to the owner under an accountable plan.
S Corp: Deductible to the company, tax-free to the owner under an accountable plan.
LLC/Partnership: Deducted by the company, tax-free to the owner under an accountable plan.
Employee Discounts
Companies can offer discounts on their products or services, but they must remain within IRS limits to stay tax-free.
C Corp: Deductible to the company, tax-free to the owner if within IRS limits.
S Corp: Deductible to the company, tax-free to the owner if within IRS limits.
LLC/Partnership: Deductible to the company, tax-free to the owner if within IRS limits.
Stock Options (ISOs)
C corporations can issue Incentive Stock Options (ISOs), which provide capital gains treatment upon sale. However, ISOs are generally not used by S corporations or partnerships.
C Corp: Deductible to the company upon exercise, taxed as capital gain to the owner upon sale.
S Corp: Not applicable.
LLC/Partnership: Not applicable.
Achievement Awards
Awards for length of service or safety achievements can be tax-free up to IRS limits ($1,600 for qualified plans in 2024). Amounts exceeding the limit are taxable.
C Corp: Deductible to the company, tax-free to the owner up to IRS limits.
S Corp: Deductible to the company, included in wages if over the IRS limit.
LLC/Partnership: Deductible to the company, included on the K-1 if over the IRS limit.
Meals & Lodging
Meals and lodging provided for the employer’s convenience can be tax-free, but personal use is taxable.
C Corp: Deductible to the company, tax-free to the owner if for the employer’s convenience.
S Corp: Deductible to the company, added to wages if non-qualified.
LLC/Partnership: Deducted by the company, added to the K-1 if non-qualified.
Working Condition Fringe Benefits
Expenses necessary for the job, such as professional dues, business training, or job-related subscriptions, are deductible to the business and tax-free to the owner.
C Corp: Deductible to the company, tax-free to the owner if directly job-related.
S Corp: Deductible to the company, tax-free to the owner if directly job-related.
LLC/Partnership: Deductible to the company, tax-free to the owner if directly job-related.
Commuter Benefits
Employers can provide tax-free commuter benefits up to IRS limits ($315 per month for transit and parking in 2024). Amounts over the limit are taxable.
C Corp: Deductible to the company, tax-free to the owner up to IRS limits. Any excess is taxable.
S Corp: Deductible to the company, included in wages if over IRS limits.
LLC/Partnership: Deductible to the company, included on the K-1 if over IRS limits.
Wellness Programs & Gym Memberships
If structured as a business necessity (e.g., job-required physical fitness), gym memberships can be tax-free. Otherwise, they are taxable compensation.
C Corp: Deductible to the company if job-related, taxable if primarily personal.
S Corp: Deductible to the company if job-related, taxable if primarily personal.
LLC/Partnership: Deductible to the company if job-related, taxable if primarily personal.
Cell Phone Reimbursement
Cell phone reimbursements for business use are deductible to the company and tax-free to the owner, but personal use must be tracked.
C Corp: Deductible to the company, tax-free if primarily for business.
S Corp: Deductible to the company, tax-free if primarily for business.
LLC/Partnership: Deductible to the company, tax-free if primarily for business.
The Importance of an Accountable Plan
One of the most critical aspects of providing tax-advantaged fringe benefits is ensuring that reimbursements and allowances follow the rules of an accountable plan. An accountable plan allows businesses to reimburse employees—including owners in some cases—for business expenses without those reimbursements being treated as taxable income. To qualify, the plan must meet three key IRS requirements: (1) expenses must have a business connection, (2) employees must adequately account for the expenses in a reasonable time frame, and (3) employees must return any excess reimbursement beyond actual expenses. If a company fails to comply with these rules—such as providing lump-sum allowances without requiring receipts or allowing employees to keep unspent reimbursements—those payments are considered taxable wages, subject to income and payroll taxes. Without an accountable plan, business owners may unknowingly convert what should be a deductible business expense into taxable income, leading to unnecessary tax liabilities and potential IRS scrutiny. Proper documentation and adherence to IRS guidelines are essential to maintain the tax benefits of employee reimbursements.
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