Compensation and Fringe Benefits Paid by Pass-Through Entities: Reporting and Tax Issues

Description

Most employees receive fringe benefits. Determining whether they are taxed, how they are taxed, and how to report these benefits can be perplexing, and even more so for PTEs and their advisers. Benefits provided to partners are sometimes reported as guaranteed payments (i.e., compensation) on a Schedule K-1 and other times are considered non-taxable perks, and the tax treatment does not always align with the same benefits provided to employees.

Some benefits provided to partners are deductible by the partnership, while others are reported as distributions to the individual partners who may claim a deduction on their personal return. Health insurance premiums, for example, are reported as guaranteed payments to the partner and are generally deductible by the partnership. Unlike other fringe benefits, the partner is allowed a deduction for the medical expense on his individual Form 1040.

At the same time, health insurance payments for greater-than-2% S corporation shareholders are reported as income to the individual shareholders on their Form W-2 (but not subject to FICA or FUTA) and are deductible as salary payments by the S corporation and typically may be deducted by the shareholder. Equally confusing is reporting retirement plan contributions made by partners and the partnership, including determining self-employment tax on the applicable portion. Advisers and owners of PTEs need to understand how to accurately report retirement, fringe benefits, and other payments to shareholders, partners, and employees so that the entity and owners properly report and remit the corresponding tax due.

Additionally, all or part of the deduction for certain compensation and fringe benefits may be disallowed regardless of whether the benefit is provided to an employee, partner, or shareholder.

Listen as our panel of experts discusses partner versus employee classification considerations, reviews reporting and withholding requirements for various compensatory benefits paid by PTEs, and provides additional considerations that can affect a PTE’s tax obligations and opportunities.