S Corp Shareholder Insurance Single Shareholder Versus Family Plan

Summary

Equally 2020 draws to a close, employers should be reviewing whether they have properly included mutual fringe benefits in their employee'due south and (if applicative) 2% S corporation shareholders' taxable wages. This is particularly true for 2020 since the CARES Act fabricated a number of changes to the rules relating to traditional fringe benefits.

Fringe benefits are defined as a class of pay for the performance of services a company gives to its employees as a benefit and must be included in an employee's pay unless specifically excluded by law. The actual value of the fringe benefits provided must be determined annually before December 31 to allow for the timely withholding and deposit of payroll taxes. Failure to properly report includible fringe benefits to the recipient and the IRS earlier January 31, 2021, on Course W-two or Form 1099 may upshot in lost deductions, besides as tax and civil penalties.

This alert provides data regarding the identification of and tax reporting requirements for several fringe benefits that employers typically offer to their employees. The alert also discusses the special treatment of several fringe benefits that were made available under the CARES Act, which was enacted in March 2020.

Common Employee Fringe Benefits

Employer-paid group-term life insurance coverage: Up to $50,000 of group-term life insurance coverage is excluded from tax, and whatsoever amount in excess of $50,000 must be included in an employee'south taxable income and is subject area to Social Security and Medicare taxes (FICA). Even though any amount of coverage exceeding $fifty,000 is included in taxable wages, withholding of federal income revenue enhancement (FIT) and land income tax (Sit) is non required. Nevertheless, employers may withhold at their selection. The amount of coverage is to be reported as wages in Boxes 1, 3 and 5 of the employee's Class W-two and in Box 12 with code "C."

Employee business expense reimbursements and allowances: Any payments of an allowance or the reimbursement of business expenses for which the employee does non provide an adequate accounting (i.e., substantiation with receipts or other records), or for which the employee does not return any excess allowance or reimbursement to the visitor, are considered to take been provided under a not-answerable plan and are required to be treated equally taxable wages for purposes of federal and applicable state and local income tax withholding, employer and employee FICA revenue enhancement, and federal and state unemployment taxes (FUTA and SUTA).

However, if the employee provides an acceptable accounting of the expenses incurred, or is "deemed" to have substantiated the amount of expenses under a per diem system, the reimbursement amounts are excludable from taxable income and wages.

COVID-19 "qualified disaster payments" to employees: Generally, annihilation of value that an employer provides to an employee is included in the employee's taxable wages, unless an exception applies. Since COVID-19 was declared a national emergency on March 13, 2020, employers can use Internal Acquirement Code (IRC) Section 139 to make tax-costless, taxation-deductible "qualified disaster payments" to employees. These payments can be made on a tax-free basis until the COVID-nineteen national emergency declaration has been lifted.

Qualified disaster payments are payments made by an employer to an employee that are not reimbursed by insurance and arereasonably expected by the employer to:

• Reimburse or pay reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster; and
• Reimburse or pay for reasonable and necessary expenses incurred to repair or rehabilitate a personal residence or repair or replace its contents to the extent that the need for such repair, rehabilitation or replacement is attributable to a qualified disaster.

The payments should not include non-essential, luxury or decorative items or services.

With respect to COVID-19, employers can pay for or reimburse expenses (or provide benefits in kind) reasonably believed by the employer to outcome from the COVID-nineteen national emergency that are non covered past insurance. For example, employers could pay for, reimburse or provide employees with tax-free payments for over-the-counter medications, manus sanitizers, home disinfectant supplies, child care or tutoring due to school closings, work-from-home expenses (e.g., setting up a home office, increased utilities expense, higher cyberspace costs, using an in-home printer, increased cell phone costs, etc.), increased costs from unreimbursed health-related expenses and increased transportation costs due to work relocation (such as taking a taxi or ride-sharing service from abode instead of using public mass transit).

In that location is no Form W-ii or 1099 reporting for IRC Section 139 payments.

Employer-paid pupil loan debt: During 2020, the CARES Human action allows employers to pay up to $5,250 of their employees' educatee loan debt and not care for the payment as taxable wages. However, for these payments to be excluded from taxable wages, they must be made under a tuition assistance program established under IRC Section 127 and meet the post-obit requirements:

• The tuition program must exist in writing and communicated to the employees with reasonable notice
• Payments cannot discriminate in favor of highly compensated employees, and no more than than 5% of the amounts paid can become to shareholders or owners (i.e., those who ain more than 5% owners of the company'south stock or capital letter interests on any day of the yr)
• Employers cannot give employees a choice between educational assist and other bounty
• The student loan debt must be for the employee'south own education (i.due east., student loan debt payments cannot exist made towards the education of an employee's kid, spouse, etc.)

PTO leave donation: Some employers allow employees to donate unused paid time off (PTO) to other employees who may demand it. If handled incorrectly, both the altruistic employee and the recipient employee may take taxable income. But if the IRS's rules are followed, but the recipient employee will have taxable income. PTO donation programs have increased in 2020 because of COVID-19's widespread upshot over where employees piece of work and their decisions to take planned time off or non. Reports indicate that about one-half of American workers switched to working from home rather than in an office and many have canceled or cut back on vacation plans, doctors' appointments, planned medical procedures, etc. As a upshot of existence dwelling house more and fewer planned days off from work, many employees accept non used their 2020 accrued PTO.

Employers can prepare up leave-sharing plans that let employees to surrender accrued PTO for the benefit of other employees dealing with medical emergencies (including death or other hardships caused by a federally alleged "major disaster," including COVID-nineteen). Under long-standing IRS guidance, employees who donate leave to other employees for such hardships through an employer leave-sharing plan may exclude the value of the leave from their income, provided the value is included in the recipient-employee's income. Employees are adversely affected past a major disaster if it has acquired astringent hardship to the employee (or to a family member) that requires the employee to miss work.

Employers administrate the exit-sharing programme pursuant to a written plan, which specifies that get out is to be used simply for medical emergencies, the decease of a spouse, child, or parent, or hardship due to a major disaster. The programme should set limits on how much leave whatever employee can donate each yr and include a detailed procedure for employees to submit a written asking for leave (and such request should describe the specific circumstances that necessitate the exit). Donated leave goes into a commingled puddle and donors cannot specify who will receive their donated leave. Recipients can receive donated leave only after exhausting all other PTO. Recipients are paid for the donated exit at their regular rate of bounty. The employer should confirm that all leave transferred nether the plan is used for the specified situation. By and large, donated disaster PTO that is not used by the cease of the disaster period must exist returned pro-rata to the donors who are still employed past the employer.

IRS Notice 2020-46 provides that greenbacks payments that employers make to charities that provide relief to COVID victims in substitution for employees forgoing PTO are not taxable wages for the donor-employees. Donor-employees cannot merits a charitable deduction for the donated leave. Employers may deduct these cash payments every bit a business organization expense or as a charitable contribution deduction if the employer otherwise meets those requirements. Recipients should all be charitable organizations, including national, regional, and organized religion-based organizations that are assisting victims of the COVID-19 pandemic.

If the rules regarding paid go out donation programs are followed properly, so an employer does not include donated PTO in the donor's Form Due west-2, simply it is included in the recipient employee'southward Form West-2.

Value of personal use of a company car: The value of a visitor automobile used for personal travel must be treated as additional wages on whatever frequency chosen by the employer upwards to and including on an almanac footing unless the employee reimburses the employer for such personal utilise. FIT withholding on fringe benefit wage additions can be calculated as a combined total with regular wages or generally tin can be withheld at a flat 22% supplemental wage rate if the employee earns under $one one thousand thousand.

Alternatively, employers tin cull not to withhold FIT if the employee is properly notified by January 31 of the year in which imputed income for the personal use of a company car will arise or 30 days afterward a vehicle is provided and the value is properly reported on a timely filed Form W-ii. But employers must withhold FICA taxes on such benefits.

For administrative convenience, an employer can calculate the value of personal use of a company vehicle for the current year based on the 12-month catamenia showtime November i of the prior year and ending Oct 31 of the electric current year (or any other 12-month menstruation ending in November or December) if the employee is properly notified no earlier than the employee's last paycheck of the current year and no afterward than the appointment the Forms W-two are distributed. Once this valuation catamenia is elected, the same accounting period generally must exist used for all subsequent years with respect to the same automobile and employee.

Many companies have moved away from providing company cars in lieu of making a cash payment to reimburse the employee for the business concern utilize of his or her personal vehicle. Car allowances paid in cash without any substantiation of business apply are fully taxable and subject field to FICA, FUTA, FIT, and Sit withholdings.

Due to COVID-nineteen restrictions, some employees who use company cars may take experienced an unexpected shift in the percentage of business versus personal apply of that vehicle in 2020. As a upshot, some employees may accept significantly higher imputed income considering the company machine was not used equally much for business during 2020. For example, if the company machine was parked at the employee's home (even if unused), the employee had personal use of the car for the period of fourth dimension that the machine was not used for business. This may come every bit a surprise to many employers and employees. The IRS has not yet published any relief that would modify the normal imputed income inclusion rules for these circumstances.

Value of personal use of company aircraft: This fringe benefit (unless reimbursed by the employee to the extent permitted nether FAA rules) is subject to FICA, FUTA, FITW, and SITW. The value calculated is based on the Standard Industry Fare Level formula provided by the IRS. Expenses related to personal entertainment use past officers, directors and x%-or-greater owners that exceed the value treated every bit compensation to key employees are nondeductible corporate expenses.

Reports signal that both personal and business utilize of company aircraft has increased in 2020 because of COVID-19, so employers may demand to address that issue for 2020, even if they accept not encountered it in past years.

Benefits that exceed the de minimis exclusion: De minimis benefit amounts tin can exist excluded when the do good is of so picayune value (taking into account the frequency) that accounting for it would be unreasonable or administratively impractical. A common misconception is that if a fringe benefit is less than $25, it is automatically considered a de minimis benefit. However, there is no statutory authority for this position. If a fringe benefit does not authorize as de minimis, mostly the unabridged amount of the benefit is subject field to income and employment taxes (FICA, FUTA, FITW and SITW). Season tickets to sporting or theater events, use of an employer'south residence, flat, boat or vacation domicile, and country club or athletic facility memberships do not qualify every bit de minimis benefits. De minimis benefits accept never included greenbacks, souvenir cards or certificates or cash-equivalent items, regardless of their amount. Gift cards or certificates that cannot be converted to greenbacks and that are otherwise a de minimis fringe do good that is redeemable for merely specific trade such as ham, turkey or another item of like nominal value, might be excludable from income. All the same, gift cards or certificates that are redeemable for a broad variety of items are deemed to be greenbacks equivalents. Any portion of a gift card or certificate that is considered a greenbacks equivalent should exist included in the employees' Forms W-2 and subject to income and employment taxes as detailed above.

While snacks and meals provided to employees can meet the de minimis requirements, they often do not. Still, almost employer-provided meals are excluded from the employees' taxable income under the accountable plan rules for working condition fringe benefits. The employer's deduction for these meals and entertainment is limited to fifty% of food and beverage expense excludable under the de minimis fringe benefit rule and quiet business concern meals with customers and clients. Nutrient or drink expenses related to employee recreation, such as holiday parties or annual picnics, are fully deductible when provided primarily for the benefit of rank and file employees. Entertainment expenses, fifty-fifty with a business purpose, are not deductible.

Caution: We accept seen the IRS take an ambitious position on examination, where the agent proposes that the visitor expenditure for on-site food and beverages regularly furnished to employees should exist treated as employee compensation because it is too frequent or extravagant to exist excludible equally a working condition or de minimis fringe benefit.

Value of employee achievement awards, gifts, and prizes: This fringe benefit is subject to FICA, FUTA, FITW and SITW. In full general, employee achievement awards, gifts and prizes that exercise not specifically qualify for exclusion are merely deductible for the employer up to $25 per person per year, unless the excess is included as taxable compensation for the recipient. Any gifts in excess of $25 per person per twelvemonth to employees in the course of tangible or intangible property are taxable wage income for employees. There are two exceptions to the general rule: (i) accomplishment awards for length of service or rubber and (ii) sure non-cash achievement awards, such as a gilded sentinel at retirement or nominal birthday gifts, which fall within the exclusion for de minimis benefits.

For a length of service or safety award to be considered excludible, there must be a meaningful presentation of the honour, the employee being recognized for the award must take at least five years of service and the accolade cannot have been granted to the same employee in any of the prior iv years. The exclusion applies just for awards of tangible personal property and is not available for awards of cash, gift cards or certificates, or equivalent items. The exclusion for employee achievement awards is express to $400 per employee for nonqualified plans (unwritten and discriminatory plans) or upward to $1,600 per employee for qualified plans (written and nondiscriminatory plans).

Job-related moving expenses paid past employer: Moving expenses incurred during 2020 must be included in the employee'south taxable compensation, unless the employee is an active duty fellow member of the U.S. Armed services and is moving to a permanent modify of station. The exclusion from employee income is scheduled to be reinstated on January one, 2026. Employers tin nevertheless pay (and obtain a deduction for paying) employee moving expenses, just such amounts are now taxable wages paid to the employee.

Value of qualified transportation fringe benefits: Employers cannot deduct expenses incurred in providing whatever transportation fringe benefits to employees. Tax-free transportation fringe benefits may nevertheless be provided to employees, just the employer will non get a deduction for providing such tax-gratis benefits. The payroll revenue enhancement treatment of employee parking, van pool and mass transit benefits remains unchanged.

Qualified commuting and parking amounts provided to the employee by the employer in excess of the monthly statutory limits are bailiwick to FICA, FUTA, FITW, and SITW. For 2020, the statutory limits are $270 per month for qualified parking and $270 for transit passes and van pooling. An employee can be provided both benefits for a full of $540 per month, tax-complimentary, with the excess included in Grade W-2. Amounts exceeding the limits cannot be excluded as de minimis fringe benefits.

Bicycle commuting benefits incurred on or subsequently January 1, 2018, are included in taxable wages subject area to FIT, FITW, FITA and FUTA. Because these benefits are taxed to the employee every bit regular compensation, the benefits are deductible past the employer.

The value of whatsoever de minimis transportation do good provided to an employee tin be excluded from Form West-ii. For example, an occasional taxi fare home for an employee working overtime or parting a concern function such as a holiday party may exist provided tax-free.

Please notation that some local jurisdictions crave mass transit options. For instance, the District of Columbia requires employers with 20 or more employees to offer qualified transit benefits. While D.C. employers are non necessarily required to subsidize the toll of their employees' commuting expenses under the new law, they are required to provide an organisation for employees to make a pre-revenue enhancement election to take total advantage of the maximum statutory limits for transit, commuter highway or bicycling benefits. San Francisco and New York Metropolis accept adopted like laws in an try to promote the employ of available mass transit options and to reduce automobile-related traffic and pollution. Employers should confirm that they are in compliance with local requirements regarding mass transit options for each employee location.

Value of noncompensatory jail cell phones (and other devices): The value of the concern use of an employer-provided cell telephone (and other communications devices) provided primarily for noncompensatory concern reasons is excludable from an employee's income as a working status fringe benefit. Personal apply of an employer-provided cell phone, given to the employee primarily for noncompensatory business reasons, is excludable from the employee's income equally a de minimis fringe benefit. Employers provide a cell phone primarily for noncompensatory business organisation purposes if there are substantial business reasons for providing the phone. Examples of substantial concern reasons include the employer'due south need to contact the employee at any time for work-related emergencies, the requirement that the employee exist available to speak with clients at times when the employee is away from the office and the need to speak with clients located in other time zones at times exterior the employee's normal workday.

Employers cannot exclude from an employee's wages the value of a prison cell phone provided to promote the goodwill of an employee, to concenter a prospective employee or as a means of providing additional compensation to an employee.

Special rules for taxing certain employee fringe benefits to 2% South corporation shareholders

Certain otherwise excludable fringe do good items are required to be included every bit taxable wages when provided to a ii% shareholder of an S corporation. A 2% shareholder is any person who owns, directly or indirectly, on any day during the taxable year, more than 2% of the outstanding stock or stock possessing more than ii% of the total combined voting power of the corporation. These fringe benefits are more often than not excluded from the income of other employees but are taxable to two% S corporation shareholders similar to partners. If these fringe benefits are not included in the shareholder'southward Form West-2, they are not deductible for tax purposes past the S corporation. The disallowed deduction creates a mismatch of benefits and expenses among shareholders, with some shareholders paying more taxation than if the fringe benefits had been properly reported on Form W-2.

Wellness, dental, vision, hospital and accident (AD&D) and qualified long-term care (LTC) insurance premiums paid nether a corporate plan: These fringe benefits are subject to FITW and SITW but not to FICA or FUTA. The amounts include premiums paid by the South corporation on behalf of a ii% shareholder, too equally amounts reimbursed by the S corporation for premiums paid straight by the shareholder. If the shareholder partially reimburses the S corporation for the premiums using post-tax payroll deductions, the net amount of premiums must be included in the shareholder's compensation. Pre-tax payroll deductions cannot exist used past 2% shareholders to reimburse premiums paid past the S corporation. Withal, 2% shareholders can deduct the premiums using the self-employed health insurance deduction their personal federal income revenue enhancement return (i.e., on Form 1040).

Deli plans: A 2% shareholder is not eligible to participate in a cafeteria programme created nether IRC Section 125, nor can the shareholders' spouse, child, grandchild or parent participate. If a 2% shareholder (or any other ineligible participant, such every bit a partner or nonemployee director) is allowed to participate in a cafeteria program, the cafeteria plan will lose its revenue enhancement-qualified status, and the benefits provided will, therefore, exist taxable to all participating employees, nullifying whatsoever pretax bacon reduction elections to obtain any benefits offered under the plan.

Employer contributions to health savings accounts and other tax-favored health plans: This fringe benefit is subject to FITW and SITW just not FICA or FUTA. If the shareholder partially reimburses the South corporation for the wellness plan contribution, using post-tax payroll deductions, the net corporeality of the contribution must be included in the shareholder'due south compensation. Pre-tax payroll deductions cannot be used by ii% shareholders to reimburse plan contributions paid by the Southward corporation. However, ii% owners can have a corresponding self-employed deduction for the cost of their health savings business relationship contributions on their Form 1040.

Curt-term and long-term disability premiums: For 2% shareholders of an Southward corporation, employer-paid curt- and long-term inability premiums are subject to FITW and SITW, but not to FICA or FUTA. Considering the disability insurance premiums are paid with afterward-tax dollars, whatever disability insurance proceeds generally would be tax-free.

Group-term life insurance coverage: Group-term life insurance premiums should be included in Boxes 1, iii and v of a 2% shareholder's Form W-2. The entire premium paid on behalf of a 2% shareholder nether a group-term life insurance policy is treated equally taxable, not simply the premium for coverage in excess of $l,000. Although the value is taxable income to the two% shareholder, the cost of the insurance coverage (i.e., the greater of the cost of the premiums or the Table I rates) is merely subject to FICA tax withholding. The cost of the insurance coverage is not subject area to FUTA, FITW or SITW. It should be noted that whatever life insurance coverage for which the corporation is both the possessor and beneficiary (e.one thousand., cardinal human being life insurance) does not meet the definition of group-term life insurance and, therefore, at that place is no income inclusion in the shareholder'south Grade W-ii.

Other taxable fringe benefits: Employee accomplishment awards, qualified transportation fringe benefits, qualified adoption assistance, qualified moving expense reimbursements, personal use of employer-provided holding or services, and meals and lodging furnished for the convenience of the employer must exist included equally bounty when made available to 2% shareholders of an S corporation. All of the above fringe benefits are subject area to FICA, FUTA, FITW, and SITW.

Nontaxable fringe benefits: The following fringe benefits are non includible in the compensation of two% shareholders of an S corporation:

• Qualified retirement plan contributions

• Qualified educational assistance upward to $five,250 (but revenue enhancement-free benefits are non available if more than than five% of the educational assistance benefits are provided to 2% Due south corporation shareholders, their spouses or dependents)

• Qualified dependent care assist upwardly to $five,000 (simply revenue enhancement-free benefits are not available if more than 25% of benefits paid during the year are provided to individuals who own more than 5%)

• Qualified retirement planning services

• No-additional-price services

• Qualified employee discounts

• Working condition fringe benefits

• De minimis fringe benefits

• On-premises athletic facilities

Topics:

• Life Insurance,
• Compensation & Benefits,
• Fringe Benefits,
• The CARES Deed,
• PPP Forgiveness,
• Year-Stop,
• Yr Finish Planning,
• Qualified Disaster Payments,
• moving expense,
• South corp,
• S Corporations,
• Expense Reimbursements

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Source: https://www.troutcpa.com/blog/common-fringe-benefits-rules-for-2-s-corp-shareholders-and-changes-under-the-cares-act

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