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). Learn more from the IRS.
To set this up for these 2% shareholder-employees:
- Click the People tab.
- Click on the employee's name.
- Under Employment Details, ensure the employee is designated as a 2% Shareholder.
- Under Benefits, click Add Benefit.
- Next to Select a Benefit, select "Create New Benefit" from the drop down menu.
- Enter a Benefit Name.
- Next to Benefit Type, select Medical, Dental, or Vision.
- 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.
- 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, and Health Savings Accounts must be taxed as wages in addition to other benefit types. Please review Publication 15-B to learn more. This excludes commuter benefits which will still be listed in your account as pre-tax.
Q: How do I know if 2% shareholder's benefits are being taxed correctly?
A: Gusto now taxes benefits based on an employee's 2% shareholder status in their Gusto account. Employees designated as 2% shareholders in their Gusto account will automatically have their benefits taxed correctly.
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.