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S Corporation vs C Corporation

Posted on 04/15/2025 ← Back to TaxBert's Tax Talk
Is an S corporation more tax beneficial than a C corporation?

Based on the provided context, an S corporation generally offers more tax advantages than a C corporation for most small businesses. Here are the key tax benefits:

1. Avoids Double Taxation [1]:

  • S corporations pass income directly to shareholders, avoiding corporate-level tax
  • C corporations face taxation at both corporate level (21%) and shareholder level when distributing dividends

2. Pass-through Benefits [2]:

  • Business losses can pass through to shareholders
  • No self-employment tax on S corporation income (beyond reasonable salary)
  • Shareholders may qualify for the 20% qualified business income deduction

However, C corporations might be more beneficial in specific situations [1]:

  • When retaining earnings for future business use
  • For businesses offering extensive fringe benefits to owner-employees
  • When the flat 21% corporate tax rate would be advantageous compared to individual tax rates

The choice between S and C corporation status should consider factors like business goals, distribution plans, and desired fringe benefits. S corporations generally provide better tax treatment for small businesses, but specific circumstances might favor C corporation status.

What fringe benefits are available to S corporation owner-employees

For S corporation owner-employees, fringe benefits are more limited compared to C corporations. Here are the key points:

Treatment of Fringe Benefits [1]:

  • S corporations are treated as partnerships for fringe benefit purposes
  • More than 2% shareholders are treated as partners
  • Family members of 2%+ shareholders (spouse, children, grandchildren, parents) are also subject to these limitations

Available Benefits [2]:

  • Some excludable fringe benefits are available
  • Health insurance premiums (must be included in W-2 wages)
  • Meals and lodging furnished for employer's convenience
  • Group term life insurance up to $50,000

Health Insurance Special Rules [3]:

  • More than 2% shareholders can take an above-the-line health insurance deduction
  • Premiums must be paid or reimbursed by the S corporation
  • Must be included in shareholder's W-2 wages
  • Deduction limited to Medicare wages shown in Form W-2 box 5

De Minimis Benefits [1]:

  • Minimal personal use of company assets may be excluded
  • Must be offered as part of a company-wide policy

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