Change an employee's 2% shareholder status - S-corps

If your business is listed as a sole proprietorship or an LLC in Gusto, you can change your employee's S-Corp owner status in Gusto. If your company (entity) type needs to be updated in Gusto so you can proceed with the next steps, follow the steps in this article first.

It's important to accurately enter an employee-owner's 2% shareholder status because this affects how their health insurance premiums are taxed and affects eligibility for other benefits.

Important: We currently don't have the ability to set up an owner to receive both a taxable salary and a non-taxed owner's draw. If you have an owner who is a W-2 employee but also requires owners draws, we recommend handling the owner's draws outside of your Gusto account as we do not handle the taxes or filings for these distributions.

Directions for changing an owner's status can be different depending on when you’re updating the shareholder's status—read the following three options and choose which closest to your situation.

Updating shareholder status at the beginning of the year—no previous contributions or deductions

If you’re updating an employee’s shareholder status to 2% and it’s the beginning of your fiscal year, follow these steps:

Click the People section and select Team members.
Click on your employee's name
Click Edit next to the Employment Details section
Select Yes next to "2% Shareholder"—this means the shareholders is a greater than 2% owner of the company.
- If you don't see the option to set someone up as a 2% shareholder: Contact us from the Help or Priority support section of your account.
- To change the designation to “No” after it's already been set to "Yes," you'll need to contact us from the Help or Priority support section of your account so we can work through tax implications with you.
Click Save.

Updating shareholder status mid-year or end of year—no previous deductions or contributions

If you’re updating an employee’s 2% shareholder status mid-or-end year, and they have NOT received pre-tax benefit deductions so far (i.e. your company has not been withholding health insurance premiums), learn how to fix the benefit totals below.

Click the People section and select Team members.
Click on your employee's name
Click Edit next to the Employment Details section
Select Yes next to "2% Shareholder"—this means the shareholders is a greater than 2% owner of the company.
- If you don't see the option to set someone up as a 2% shareholder: Contact us from the Help or Priority support section of your account.
- To change the designation to “No” after it's already been set to "Yes," you'll need to contact us from the Help or Priority support section of your account so we can work through tax implications with you.
Process a benefits correction for the shareholder.
- Important: When creating the benefit for your 2% shareholder, you’ll need to input the year-to-date amount that should be reported on your W-2s for this year in the “Company Contribution Per Pay Period” section.

Once the correction is processed, either disable the benefit entirely by removing it, or, adjust the amounts to reflect the per-payroll contribution amount that you’d like to apply to future payrolls—this will make sure the deductions and contributions are being recorded for your employees' W-2s moving forward.

The shareholder has pre-tax benefit deductions that need correcting—the shareholder was misclassified

If you’re updating an employee’s 2% shareholder status mid-or-end year, and they HAVE received pre-tax benefit deductions this calendar year (i.e. your company withheld health insurance premiums)—our team will need to assist you with adjusting their benefits as there are tax implications.

Please get in touch with our team by email, and include:

The names of the employees who are 2% shareholders
The year-to-date benefit totals medical, dental, or vision

Our team will get in touch with next steps.