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.
2017 S-Corp Owner's Benefit Tax Correction
- An ‘Off-Cycle’ payroll will be processed to correct for the employee deductions.
- A ‘Wage Correction’ payroll will be processed to correct for the company contributions.
Once processed, you can view the off-cycle payroll and wage correction payroll from your Reports tab under Payroll History.
How is the tax amount owed calculated?
For 2% shareholders, all 2017 pre-tax employee deductions and pre-tax company contributions for health insurance will be reclassified as taxable wages due to their S-Corp Owner’s status. Tax amounts owed are calculated based on the amount of health insurance deductions/contributions that need to be reclassified as taxable wages.
As a result of this correction you may have been contacted about additional taxes that may be owed by both the 2% shareholder employee(s) and the employer.
What will Gusto debit for?
Gusto will debit the company for both the employee and employer taxes owed and pay the agencies on your behalf. Personal income tax (federal and state) owed at the employee level will not be part of the company debit and will reconcile on the employee’s 2017 personal tax returns.
- Note: 2% shareholder employee deductions are fully taxable as wages at both the employee and employer level. However, company contributions toward 2% shareholder health insurance are only taxable at the employee level, for both federal and state income tax.
We recommend setting up a post-tax deduction on the next payroll run for any employee(s) who owe the company for the taxes paid on their behalf.
Why is the company debited for the employee taxes owed?
Gusto must collect the tax amounts owed from the company for two reasons:
- There are no earnings on the correction payrolls for taxes to be deducted from.
- We cannot pull these funds directly from an employee’s personal bank account.
To minimize the total company debit, personal income tax (federal and state) owed at the employee level will not be part of the company debit and will reconcile on their 2017 personal tax returns.
Will this sync to my accounting platforms?
You will need to manually sync the off-cycle and wage correction payrolls to your accounting software--this applies for customers using autosync as well. To manually sync these payrolls:
- Navigate to the Reports tab.
- Navigate to the Payroll History tab.
- Click on the payroll you would like to sync.
- Click Sync at the top of the payroll detail page.
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.