Are Employee Benefits Taxable for an S-Corp? Aflac Coverage Question

So I've got two different scenarios at our small business (S-Corp) and I'm honestly confused after reading through Publication 15. The main issue is about an employee who broke their ankle and was out of work for about 3 weeks. During that time, our company covered the cost of what would have been their withholding for their Aflac insurance. The company isn't asking the employee to pay this back. I'm wondering if this would fall under a taxable fringe benefit? It's not a huge amount (around $120 total) but I want to make sure we're handling it correctly for tax purposes. I didn't see anything specific about this type of situation in Pub15. Would we need to add this amount to their W-2 as taxable income? Or since it's related to their insurance during a medical leave, is it treated differently?

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20 comments

JacksonHarris

•8M

This is a good question about employee benefits taxation. For S-Corps, when the company pays for something that would normally be the employee's responsibility, it's generally considered taxable income to the employee. In your specific scenario with the Aflac coverage, since the company paid the employee's portion of the premiums and isn't requiring reimbursement, this would typically be considered additional compensation to the employee. You would need to include this amount ($120) in the employee's wages on their W-2. The key factor here is that the company is essentially giving the employee a benefit (covering their insurance premium) without requiring repayment. The IRS typically views this as additional compensation.

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JacksonHarris

•8M

Even if the company coded it as a medical benefit, it's still functionally additional compensation when covering the employee's portion of premiums they normally pay. The IRS looks at the substance of transactions rather than just how they're labeled internally. One-time versus ongoing doesn't fundamentally change the taxable nature, though it might affect how and when you report it. Since it was a small amount during a specific medical leave, you would include it in wages for the appropriate pay period when the company covered these costs.

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Royal_GM_Mark

•8M

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Royal_GM_Mark

•8M

It absolutely works for different types of deductions and distinguishes between various insurance types. The system knows the differences between health insurance (which has specific tax rules), supplemental insurance like Aflac, and disability coverage, providing guidance specific to each category. I understand the skepticism, but I actually found it more reliable than my previous accountant who gave inconsistent advice. It provides citations to specific IRS publications and tax code sections, so you can verify everything yourself or share with your CPA to confirm.

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Chris King

•8M

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Rachel Clark

•8M

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Chris King

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Mia Alvarez

•8M

You can tell by looking at your payroll records and how the deduction is being processed. If the Aflac premium is being deducted before taxes are calculated (reducing the taxable income), it's pre-tax. If it's being deducted after taxes are calculated (not affecting the taxable income), it's after-tax. This absolutely makes a difference in reporting. If it's pre-tax, you need to add back that amount to taxable wages when you cover it. If it's after-tax, it's still taxable when covered by the employer, but doesn't affect things like Social Security tax calculations if those were already paid on the full amount.

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Jamal Harris

•5M

Based on the discussion here, it sounds like you'll need to include that $120 in the employee's taxable wages. Since your company covered what would normally be the employee's responsibility for Aflac premiums without expecting repayment, the IRS treats this as additional compensation. For S-Corps, this is pretty straightforward - add it to their wages in the pay period when you covered the costs, and make sure it's included on their W-2 at year-end. You'll also need to withhold the appropriate payroll taxes on this amount. One thing to double-check is whether your Aflac deductions are currently set up as pre-tax or after-tax, as someone mentioned above. You can see this by looking at how the deduction appears on your payroll - if it reduces taxable income, it's pre-tax; if it doesn't, it's after-tax. This affects exactly how you handle the tax reporting, but either way, covering the employee's portion makes it taxable income to them. Document everything well since it was related to medical leave - you want a clear paper trail showing this was a one-time accommodation during their ankle injury recovery, not an ongoing benefit that could create precedent issues with other employees.

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Mei Wong

•3M

This is really helpful advice! I'm dealing with a similar situation at my small business and was wondering - when you say to add it to wages "in the pay period when you covered the costs," what if the company covered multiple pay periods worth of premiums all at once? Should we spread it across the pay periods it was meant to cover, or just add the full amount to one paycheck? Also, for the payroll tax withholding, do we calculate that on just the $120 or include it with their regular wages for that period?

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