Fringe Benefits

[AccTaxMan]

Client is the owner and also an employee of a S-corp. He told me his babysitter at home is being paid by his S-corp (he is the 100% owner). I explained to him in that case, whatever paid by the S-corp for his babysitter is considered taxable fringe benefit which should be included in his W-2 from the S-corp.

Any problem with it?

[Burke]

Yup, that is the way I would handle it. Might also check to see if that is a resolution which has been approved by "board of directors," and is in the minutes. Would he/spouse qualify for child care deduction? Could it qualify under Dependent Care Benefit? (Box 10).

[Roland Slugg]

A Dependent Care program, whether it's a stand-alone plan established under Code §129 or as one choice available under a Cafeteria plan established under Code §125, is a possibility here ... but probably a remote one. Unless the Plan (§125 or §129) is made available to all employees (under rules that are fairly similar to the establishment of a retirement plan), it will fail the anti-discrimination test.

In that case it becomes a taxable fringe benefit, but then the T/P may qualify for the child care credit on his own personal return.

[AccTaxMan]

A Dependent Care program, whether it's a stand-alone plan established under Code §129 or as one choice available under a Cafeteria plan established under Code §125, is a possibility here ... but probably a remote one. Unless the Plan (§125 or §129) is made available to all employees (under rules that are fairly similar to the establishment of a retirement plan), it will fail the anti-discrimination test.

In that case it becomes a taxable fringe benefit, but then the T/P may qualify for the child care credit on his own personal return.

Anti-discrimination test will not be a problem because the S-corp only has two employees, him and a part-time employee who is single with no dependent.

Can you point me to the procedure to set up the plan under Code 129?

[veritas]

He can not

Anti-discrimination test will not be a problem because the S-corp only has two employees, him and a part-time employee who is single with no dependent.

Can you point me to the procedure to set up the plan under Code 129?

Receive more than 25% of the dependent care benefits.

Since you indicated he would be the only participant the plan would discriminate.