J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Employee Benefits

In General

Employers are not required by law to offer any specific types of employee benefits. However, in today’s job market, employers may want to offer various fringe benefits (also called perks or perquisites) as a way of attracting and retaining a good work force. Businesses may also want to provide these benefits because owners want such benefits for themselves as well.

If you pay certain expenses for an employee, you can claim a deduction. This is so even though the benefits may be excluded from the employee’s gross income. If you are a sole proprietor, partner, or LLC member, you are not an employee and cannot receive these benefits on a tax-free basis. For purposes of this rule, employees who are more than 2% shareholders in their S corporations are treated the same as partners and cannot get these benefits on a tax-free basis. Limits on benefits for sole proprietors, partners, LLC members, and more-than-2% S corporation shareholders are discussed later in this chapter.

The benefits provided to an employee must be ordinary and necessary business expenses. The cost of the benefits must be reasonable in amount. And, in most cases, the benefits must be provided on a nondiscriminatory basis; they cannot be extended only to owner-employees and highly paid workers.

There are 2 main categories of employee benefits. The first is called statutory employee benefits. These benefits, specifically detailed in the Internal Revenue Code, include health and accident ...