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How to change an employee's S-Corp owner status

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. Directions can be different depending on when you’re updating shareholder status. Read the following three and choose what’s closest to your situation. 

If you’re updating an employee’s shareholder status to 2% and it’s the beginning of your fiscal year, follow these steps:

  1. Navigate to the People section
  2. Click on your employee's name
  3. Click Edit next to the Employment Details section
  4. Select Yes next to "2% Shareholder"
    • Please note: in order to change the designation to “No,” you'll need to contact us so we can work through tax implications with you.
  5. Click Save

If you’re updating an employer’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:

  1. First, follow the above to update the employee’s 2% status
  2. 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. 
  3. Formally record this company contribution by running an off-cycle payroll with $0 net wages.
  4. 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.

If you’re updating an employer’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. 

 

Payroll, benefits, HR and more.