Common Small-Business Tax Snafus – About Fringe Benefits
For employees, fringe benefits are all good. For business owners, though, they have both good points and some slightly less good points. The good and the less good depend largely on the business entity: owners of C corporations get the biggest benefit from their fringe benefits than do owners of any other entity.
On the plus side, the value of fringe benefits can increase your overall compensation. Even better, some can do that without adding to your personal income tax bill, while remaining deductible expenses for the business. Con- sider health insurance premiums, for example: for C corporations, they’re fully deductible by the company; for all other entities, they’re fully deductible on the personal income tax returns of the business owner. Retirement plan contributions typically follow the same path. Plus, any of these expenses that you pay on behalf of employees are completely deductible business expenses.
Other fringe benefits, such as life insurance premiums, are only tax-free to C corporation owners. For any other business owner, such premiums paid by the company become taxable income on his personal return. Even with C corporations, some benefits that are tax-free to general employees don’t get the same treatment when it comes to owner-employees. The rules involving these benefits are intricate, so talk to your accountant before you decide whether to implement them.