Many owner-employees of corporations pay more taxes than are necessary. That’s because they take all of their compensation in the form of cash. Cash compensation is subject to an income tax rate of as much as 35%. In other words, for every dollar your company pays out, you may net as little as sixty-five cents (and state income taxes can push that net even lower).
How can you reduce the tax on your compensation? One possibility is to take a portion of your compensation in the form of tax-favored fringe benefits. Like cash compensation, the cost of the fringe benefits is fully deductible by your corporation. But, unlike cash, certain fringe benefits are tax-free. So when your company spends a dollar, you net a dollar.
Among the corporate fringe benefits that qualify for this favorable treatment are:
- Health insurance
- Disability income plans
- Child care assistance plans
- Tuition assistance programs
- Long-term care insurance
- Retirement planning services
- Commuter parking
- On-premises athletic facilities
Because of the potential for significant tax savings, there are some strings attached. The tax law imposes certain requirements that vary depending on the type of fringe benefit. For example, in some cases benefits must be provided to the corporation’s rank-and-file employees as well as the owners. And in some cases there is a limit on the amount of the benefits you can receive.
Please contact us if you would like more information on tax-favored fringe benefits or want assistance in designing a fringe benefit plan for your corporation.