Fringe Benefits Compliance: What Shareholder-Employees Need to Know
September 2, 2025 - 9 minutes read
Fringe benefits are an integral part of compensation packages, and for S Corporations, properly managing their tax treatment under the Big Beautiful Tax Bill (BBTB) is more critical than ever. The updated tax laws have introduced stricter compliance requirements around fringe benefits, particularly for shareholder-employees holding more than a 2% stake in the company.
If improperly reported, fringe benefits can lead to underreported income, hefty penalties, and even audits. By understanding the nuances of fringe benefit taxation under the BBTB, you can ensure compliance while optimizing your business’s tax strategy.
This guide provides actionable steps to help S Corporation owners manage fringe benefits effectively, avoid common mistakes, and align with IRS rules.
Why Fringe Benefits Compliance Matters
Fringe benefits are non-wage compensations provided by employers, such as health insurance, retirement contributions, or use of a company car. While these benefits often boost employee satisfaction, they come with specific tax obligations, especially for shareholder-employees with significant ownership stakes in an S Corporation.
Stricter Monitoring Under the BBTB
The BBTB has increased IRS scrutiny on how fringe benefits are reported for shareholder-employees. These individuals are treated differently from regular employees in many cases, and most benefits provided to them are considered taxable income.
Risks of Non-Compliance:
- Underreported Income: Misclassification of taxable benefits can lead to audit triggers and income recalculations by the IRS.
- Fines and Penalties: Businesses failing to comply with fringe benefit reporting rules may face significant penalties.
- Tax Filing Delays: Incorrect handling of fringe benefits creates unnecessary complexity when preparing year-end tax filings.
Being meticulous about fringe benefits compliance not only protects your business from penalties but also helps you take full advantage of tax advantages where applicable.
Actionable Steps for Fringe Benefits Compliance
1. Review Your Benefits Package Thoroughly
The first step in achieving compliance is understanding which benefits your S Corporation provides and how they are treated for tax purposes. Benefits for shareholder-employees often differ from those for regular employees, so it’s essential to assess each item carefully.
Identify Taxable Fringe Benefits
Some of the fringe benefits that are taxable for over-2% shareholders include:
- Employer-provided health insurance premiums
- Group life insurance premiums exceeding $50,000 in coverage
- Personal use of company vehicles
- Certain retirement contributions
Key Action: Compare the benefits offered to shareholder-employees with IRS Publication 15-B, which outlines taxable and nontaxable fringe benefits.
Audit Your Benefits Structure
- Compile a list of all fringe benefits provided by the company.
- Determine which benefits are taxable for more-than-2% shareholders.
- Document each benefit’s value and how it’s calculated.
Pro Tip: Regularly update this list, as fringe benefits or tax laws may change over time.
2. Coordinate with Payroll Providers
Incorrect reporting of fringe benefits often stems from poor communication between business owners and payroll processors. Ensuring accurate and timely reporting is crucial during year-end payroll filings.
How Payroll Providers Can Help
- Calculate Taxable Benefits: Work with your payroll provider to ensure taxable fringe benefits are correctly added to shareholder-employees’ wages.
- Generate Accurate W-2 Forms: Verify that fringe benefits are reported on Form W-2 as taxable income.
- Monitor Deductions: Ensure applicable benefits, like employee-paid portions of health insurance, are handled correctly.
Key Steps:
- Schedule regular check-ins with your payroll provider to review how fringe benefits are processed.
- Provide detailed documentation for all benefits offered to shareholder-employees.
- Use payroll software that supports fringe benefit reporting to streamline calculations.
Pro Tip: If you’re using a DIY payroll system, double-check fringe benefits entries before issuing W-2s to avoid reporting errors.
3. Access and Leverage IRS Resources
The IRS offers comprehensive resources to help businesses understand fringe benefits compliance. Familiarizing yourself with these tools can help you stay compliant and avoid potential pitfalls.
Key IRS Resources
- IRS Publication 15-B: A guide to employer-provided fringe benefits, including taxable and nontaxable classifications.
- IRS Form 8922: Use this form for adjustments or corrections to previously reported fringe benefits.
- Online Tax Tools: The IRS website provides calculators and FAQs to assist small businesses with compliance.
How to Use These Tools
- Bookmark IRS publications and reference them regularly when questions arise about fringe benefits.
- Train your finance or HR team on using these resources effectively.
- Attend webinars or workshops hosted by the IRS or reputable accounting organizations to stay informed about changes in tax laws.
Pro Tip: Partner with a CPA or tax advisor who specializes in small business tax planning to interpret complex IRS guidance more easily.
Practical Tips for Staying Compliant
1. Stay Ahead of Changes in Tax Laws
Tax laws and IRS rules are constantly evolving, especially under large bills like the BBTB. Keep yourself informed about new regulations that may affect your fringe benefits strategy.
How:
- Sign up for tax updates from the IRS or industry-specific newsletters.
- Work with a CPA who will alert you to legislative changes impacting S Corporations.
2. Educate Shareholder-Employees
Many shareholder-employees may not know which fringe benefits are taxable or how their compensation is structured. Providing education ensures they are on the same page regarding tax reporting requirements.
How:
- Host annual meetings or seminars to explain fringe benefit taxation.
- Provide written explanations or guides for commonly misunderstood benefits.
3. Document Everything
Accurate and thorough documentation can serve as your first line of defense if the IRS requests an audit.
What to Document:
- Benefit calculations
- Supporting receipts or invoices
- IRS classifications and interpretations
Documenting these ensures you have a complete paper trail for every fringe benefit offered.
The Cost of Non-Compliance
Failure to properly report fringe benefits can have ripple effects on your business. Here are some potential consequences of non-compliance under the BBTB’s more stringent guidelines:
- Financial Penalties: Missteps in fringe benefit reporting could result in fines that strain your company’s cash flow.
- Audits: Fringe benefit issues increase the likelihood of comprehensive IRS audits on your company’s finances.
- Shareholder Dissatisfaction: Failing to communicate fringe benefit changes or taxable treatment to shareholder-employees may harm morale.
Addressing fringe benefits proactively not only ensures compliance but also fosters trust and transparency between business owners and shareholder-employees.
Final Thoughts
Fringe benefits compliance isn’t just about minimizing risk—it’s about positioning your S Corporation for financial success under the regulations outlined in the Big Beautiful Tax Bill. By reviewing your benefits package, coordinating with payroll providers, and leveraging IRS resources, you’ll stay ahead of potential challenges and optimize your tax strategy.
Navigating fringe benefits for shareholder-employees may seem complex, but with the right processes and expert guidance, it becomes a manageable and rewarding task. Take action today to protect your business and maximize the value of your compensation packages.
Next Steps:
Take the next step toward confident compliance—connect with COBB CPA, a firm specializing in small business tax strategy and S Corporation compliance as well as help you explore payroll management tools that streamline fringe benefit reporting. With expert support and smart systems in place, your business will be positioned for long-term success.