Different employee benefits yield different financial outcomes for employers depending on whether the firm is a C Corp, an S Corp, an LLC or a not-for-profit. For example, extolling the virtues of a tax-deductible benefit to a not-for-profit can end up an embarrassment to the advisor. The benefit package must have tangible value for employees, but to be adopted it still needs to align with the tax structure of the employer.

Below are some ways various tax entities are affected by different employee benefits. Given the significant differences in tax consequences to the employer, the employee benefit advisor should learn to know the consequences of these tax structures – or make sure to work with people who know.   

S Corps 

Two primary tax implications for owner-employees of S Corps affect their benefit-design thinking.

First, all income generated by the business flows through to the owners' personal taxes.

Second, S Corp owners don't share in the same tax benefits of many common employee benefits they can offer to their workers, specifically group term life insurance, accident and health plans, and disability income plans.

In the first implication, owners of S Corps will typically not personally benefit from a deferred compensation plan. What they defer from their own salaries will flow through to them personally as company profit. They effectively save little, if any, income tax. The second tax implication — that because of the "2 percent ownership rule," owners don't share in the tax benefits of several common employee benefits — offers an excellent opportunity to consider alternative plans.

Take, for example, a health savings account (HSA) plan, which allows the S Corp owner-employee to participate in the plan like other employees. Such a plan lowers the cash flow commitment for the company, yet allows the owner-employee to contribute more toward his or her personal HSA. What may close the window on one benefit may open the door on another.

LLCs 

Although S Corps and LLCs are both flow-through entities for tax purposes, that doesn't mean they're taxed identically. For example, assuming LLC owner-employees have chosen to be taxed as a partnership, all their income will be treated as self-employment income.

This is different from an S Corp, where the owner may take some income as wages and some as excess profits. For example, assume a solo owner of both an LLC and an S Corp make $100,000. If defensible, the S Corp owner might treat $80,000 as wages — therefore subject to employment taxes — and $20,000 as K-1 earnings. The LLC owner, however, would have all $100,000 subject to employment taxes.

Consider how this may affect decisions with regards to their qualified plans: An S owner would show a lower wage that the comparable LLC owner, and therefore not be able to benefit the same way in the qualified plan formula. This may lead the S Corp owner-employee to deemphasize qualified plans and focus on other benefits.

C Corp 

Owner-employees of C Corps often use employee benefits as a way to lower their personal taxes. Different from owners of S Corps and most LLCs, they get to share in the tax advantages of employee benefits such as group term life insurance, accident and health plans, and disability income plans.

And because they're subject only to current tax on that part of earnings they pay themselves as wages, a deferred compensation play can be very appealing to them personally. This benefit is enhanced because, at the corporate level, a tax on the company's accumulated earnings can be a concern. A deferred compensation plan may represent a corporate liability that shields the company from the accumulated earnings tax.

Not-For-Profits 

Especially in the medical field, it's not always evident that the employer is a not-for-profit entity. This tax status can significantly impact the employee benefits they wish to offer. By law, not-for-profits are restricted in the kind of deferred compensation plans they can offer their executives. A 457 plan doesn't work the same as a traditional nonqualified deferred compensation plan and often doesn't include the same benefits.

At the same time, because they don't need tax deductions, these plans may be more open to creative solutions for executives. For example, whereas an S Corp owner may hesitate to offer a split dollar program to an executive because the owner doesn't receive a tax deduction, a not-for-profit may find this to be the perfect "golden handcuff" benefit.

An employee benefit advisor need not be a tax professional, but tax awareness is one more quiver in the bow of the well-rounded benefit professional. The employer's tax status will not necessarily determine the benefit design, but it will direct the design's outcome – all the more reason to make sure the status is known and understood.