Year-end payroll addbacks: A reminder for employers

As businesses look to maximize their financial strategies, understanding payroll fringe addbacks is crucial, especially for S corporations. These addbacks can significantly impact taxable income and the overall financial health of a company. This article serves as a reminder for employers to navigate payroll fringe addbacks effectively, particularly concerning S corporation shareholder addbacks.

What are year-end payroll (fringe) addbacks?

Payroll addbacks refer to certain fringe benefits that must be added back to an employee's or shareholder's income when calculating taxable income for the business. While these benefits provide value to employees, they can also affect tax liabilities for S corporations and their shareholders. Common fringe benefits that may require addbacks include:

• Health insurance premiums: Premiums paid for health insurance can sometimes be added back for S corporation shareholders.
• Personal use of company vehicles: If an employee or shareholder uses a company vehicle for personal purposes, the value of that use may need to be added back.
• Life insurance premiums: Premiums for life insurance policies may also require an addback, particularly if the company is the beneficiary.

S corporation shareholder addbacks

For S corporations, the tax treatment of shareholder benefits can differ from that of regular employees. Shareholders must be aware of specific addback rules that can impact their personal tax situations. Here are key considerations:

1. Health insurance premiums: If an S corporation pays for a shareholder’s health insurance, the premiums must be reported as income on the shareholder’s personal tax return, but some shareholders are also eligible for an above-the-line deduction. This means the amount is added back to the corporation's income when calculating pass-through taxation.
2. Distributions vs. salary: S corporation shareholders should be cautious about how they categorize their earnings. Distributions are not subject to self-employment tax, while salaries are. Misclassifying payments can lead to addbacks and tax complications.