Natalie operates her bookkeeping service as a corporation. She is the sole shareholder and is an employee functioning as the chief operating officer. The corporation employs several other individuals and offers them good fringe benefits: group term life insurance, health insurance, disability insurance, and a 12% qualified pension plan. Natalie's good friend, Ricci, operates a custom software development company.
The business is an S corporation, and Ricci is the sole shareholder. She is also an employee who serves as the manager. Upon Natalie's recommendation, Ricci copies the fringe benefit package of Natalie's corporation. Assume both businesses are quite profitable.
a. How do the employee benefits affect the tax bills of Natalie and her corporation?
b. How do the employee benefits affect the tax bills of Ricci and her corporation?
c. Write letters to both Natalie and Ricci explaining these tax ramifications.