If your business is listed as a sole proprietorship or an LLC in Gusto, you can change your employee's S-Corp shareholder status in Gusto. If your company is not set up as an S-Corp or LLC, change your entity type 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.
- 2% or less shareholders who are paid as W-2 employees are eligible to participate in pre-tax section 125 benefit deductions.
- Greater than 2% shareholders are not eligible to participate in pre-tax section 125 benefit deductions.
If you have Gusto managed benefits, let us know if your shareholders are 2% or less, or greater than 2% shareholders, so we can make sure your contribution scheme is compliant.
2% shareholders and owner's draws
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, you'll need to handle the owner's draws outside of Gusto.
Depending on when you're updating the shareholder's status, and if they've had previous benefit deductions, the next steps may differ. Choose the most applicable scenario from the dropdowns below.
Beginning of the year update to shareholder status—no previous deductions or contributions 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.
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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.
Mid-year or end of year update to shareholder status—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.
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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.
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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.
Pre-tax benefit deductions 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.