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Set up benefits for S-Corp 2% shareholder-employees

For S-Corp or LLC companies, the IRS requires that health insurance premiums paid by the company to employees with a greater than 2% ownership be reported as wages (not pre-tax benefits). For more information, review Notice 2008-1 from the IRS.

To set this up for these 2% shareholder-employees:

  1. Click the People tab.
  2. Click on the employee's name.
  3. Under Employment Details, ensure the employee is designated as a 2% Shareholder. 
  4. Under Benefits, click Add Benefit.
  5. Next to Select a Benefit, select "Create New Benefit" from the drop down menu.
  6. Enter a Benefit Name.
  7. Next to Benefit Type, select Medical, Dental, or Vision.
  8. You will have the option to enter a Company Contribution Per Pay Period or Employee Deduction Per Pay Period. Reference the tax implications below before proceeding.
    • Company contributions: Taxable at the employee level only, for both federal and state income tax.
    • Employee deductions: Fully taxable as wages at both the employee and employer level. 
  9. Click Save.

Note: If you have benefits with Gusto, your 2% shareholder-employee settings will be managed internally. 

Questions and Answers

Q: Which benefits must be taxed as wages for 2% shareholders?
A: Medical, Dental, Vision, HSAs, and more must be taxed as wages. Please review Publication 15-B to view all a full list of benefits that are treated as wages. 

Q: What if a 2% shareholder status changes part way through the year?
A: Change the 2% shareholder status in the employee's account. Employees who are 2% shareholders at any point during the year, must be taxed as such for the entire year.

Q: Why isn't there a location in the employee profile to select that they're a 2% Shareholder?
A: If your employee is receiving Owner's Draw payments, Gusto automatically associates them as company owners, and therefore 2% shareholders.

Q: How do I pay taxes on the premiums if they aren't being deducted from me?
A: The total premium amount is added to the 2% shareholder's gross earnings so that the income is taxed appropriately.