If your business is a sole proprietorship, an LLC, or taxed as either, you can change your employee's S-Corp owner status in Gusto.
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.
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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"
- Reminder: in order to change the designation to “No,” you'll need to contact us from the Help section of your account so we can work through tax implications with you.
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If you don't see the option to set someone up as a 2% shareholder: contact us from the Help section of your account.
- 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, follow these steps to make sure you’re reporting correctly for the year:
- First, follow the above to update the employee’s 2% status
- Then, set up any benefits to the employees’ account
- Important note: 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.
- Formally record this company contribution by running an off-cycle payroll with $0 net wages.
- Once steps 1-3 are complete, either disable the benefit entirely by removing it OR, adjust the amounts to reflect the per-payroll deduction amount that you’d like apply to future payrolls. This option will make sure the deductions and contributions are being recorded for your employees' W-2s moving forward.