Salary and fringe benefits (together constituting “compensation”) are both a substantial cost for your business and an important means for attracting and retaining employees. The extent to which you can offer good compensation while keeping your business costs down figures into your business’s future prospects. Salary and fringe benefit planning is therefore important and may have some bearing on your future choice of entity.
Tip: This said, compensation probably won’t be the decisive factor behind a decision to change entity, but as you reconsider your choice of entity, note the impact of your various choices on the area of compensation, especially relating to federal taxation.
Tax Deductions for Employee Salaries
Corporations, partnerships, and LLCs that are taxed as partnerships generally can deduct salary payments as well as premium payments for employee health, life, and disability insurance.
Withholding Tax and Salaries of Owners
In corporations, salary payments to shareholder-owners, in almost all cases, have income tax and Federal Insurance Contributions Act (FICA) tax (Social Security and Medicare tax) withheld. Partners, 2 percent S corporation shareholders, and members of LLCs taxed as partnerships must pay self-employment tax on salary. Of course, sole proprietors must also pay self-employment tax.
C Corporations and Tax Treatment for Fringe Benefits
C corporations can deduct payments for health, life, and disability insurance premiums made for their employees, including shareholders. S corporations can deduct these payments for employees who aren’t 2 percent owners. Unincorporated entities can deduct these payments for nonowner employees only. Their “self-employed” owners, though, can claim a full deduction for premiums paid for medical insurance for the self-employed owner (including the owner’s spouse and family). Consult your tax attorney for more details on the tax treatment of specific fringe benefits.
Corporation Owners and Qualified Retirement Plans or Cafeteria Plans
Shareholders in corporate retirement plans can borrow, subject to certain limitations, from their qualified retirement plan account, whereas noncorporate owner-employees in Keogh plans cannot. Check with your attorney, accountant, and/or financial advisor for details and guidance.
Corporation owner-employees, with the exception of 2 percent S corporation shareholders, can participate in cafeteria plans. These plans permit employees to choose to allocate part of their compensation among cash and various fringe benefits. Sole proprietors, partners, and members of LLCs taxed as partnerships are ineligible for cafeteria plans.
Tip: All entity choices can offer cafeteria plans to nonowner employees.
If you have questions, contact the Experts at Henssler Financial: experts@henssler.com or 770-429-9166.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
