The compensation package provided by an employer is usually divided into two portions�cash compensation and fringe benefits. The establishment of a small business�s fringe benefit plans is usually dictated more by the specific needs of the business owners than by tax considerations. For example, the need for life or health insurance depends on the owners� age, marital status, and number of dependents. Nevertheless, the tax treatment of various types of compensation arrangements is extremely important. The tax benefits of certain types of compensation include one or more of the following:

The purpose of compensation planning is to design the compensation package to meet the needs of the owners and of the business. Some components of the compensation package will be dictated by the specific needs of the business owners. In other cases, the tax costs or benefits of providing such compensation will be balanced to maximize the overall compensation available to the owners.

The shareholder-employees of a closely held corporation have an advantage for the purposes of fringe benefit plans such as health insurance and group term life insurance. The corporation is permitted to fully deduct reasonable contributions for these benefit plans, including contributions made on behalf of owner-employees. In addition, the employer contribution for benefits under such plans are not taxable to employees unless the death benefits under group term life coverage exceed $50,000.

In many instances business owners and key employees desire permanent life insurance coverage as an employee benefit. Permanent life insurance has the benefit of portability and predictable level premium costs. Life insurance needs for most business owners and executives will continue beyond the employment years for estate planning purposes.