Properly Reporting Owner Compensation and Benefits

The tax treatment of company-paid owner compensation and fringe benefits vary across business entity types. We often find that owners are not compensated properly which can cause issues with the IRS.

Let’s look at some general rules for correctly compensating owners:

For a C corporation filing Form 1120:
  • Compensation of an owner is done through payroll.
  • The employer is required to pay its share of Social Security and Medicare tax (similar to other employees).
  • Generally, the company-paid medical insurance costs that are paid on behalf of the owner will not be taxable to the owner.
For an S corporation filing Form 1120S:
  • Compensation of an owner is done through payroll.
  • The employer is required to pay its share of Social Security and Medicare tax (similar to other employees).
  • For a shareholder who owns more than 2 percent of the S corporation, the company is required to include the total cost of company-paid medical insurance costs in Form W-2. Furthermore, on the shareholder’s personal income tax return, he/she may be entitled to a deduction from adjusted gross income for medical insurance costs that were included in his/her Form W-2.
For a limited liability company filing Form 1065 with more than one member and treated as a partnership for tax purposes:
  • A member (owner) of an LLC who is treated as a partner for tax purposes cannot be compensated via payroll.
  • A member who receives compensation for services is paid a guaranteed payment.
  • The guaranteed payment does not reflect any tax withholdings and the recipient is responsible for paying both the employee and employer portion of Social Security and Medicare taxes.
  • Company-paid medical insurance costs are required to be included as a guaranteed payment to the member. On the member’s personal income tax return, he/she may be entitled to a deduction from adjusted gross income for medical insurance costs that were included in his/her guaranteed payment.
Compensating an owner properly could save you from potential issues that could arise under an IRS audit so, if you’re unsure of what to do, contact us for help.

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