2% or more shareholders in an "S" election corporation must treat company paid health insurance and company provided automobiles as taxable fringe benefits differently than standard employees. The insurance and automobile amounts paid by the company must be added to OnPay so their shareholders W-2 is correct at the end of the year. For 2% shareholders, health insurance is only subject to Federal and State Income Tax (where applicable). Not FICA, Medicare, or any other employment taxes. Personal use of company auto is subject to all employment taxes. The amounts paid using each pay type are added to Box 14 of the shareholders W-2.
OnPay handles this very simply by giving you pre-built pay types named "Shareholder Insurance" and "Shareholder Auto".
Adding the Pay Types
To add either of these fringe benefits for shareholders follow these instructions:
- Log into OnPay
- Choose the Employees Menu Icon
- Choose the 2% Shareholder you want to add Insurance or Auto benefit for
- Choose the "Pay" section
- In the Compensation box, click the "Add/Order Items" button
- If you want to add the Shareholder Insurance pay type then choose Shareholder Insurance from the Select "Pay Type" drop down box and click the "+Add Item" button.
- If you want to add the Shareholder Auto pay type, then choose Shareholder Auto from the Select "Pay Type" drop down box and click the "+Add Item" button.
- ***Note, you can repeat steps 6 and 7 without exiting the menu to Add/Order Pay Items.
- Close out of the Add/Order Pay Items menu by clicking the "X" in the top right-hand corner.
- Close out of the employee by clicking the "X" in the top right-hand corner.
To add these benefits for any other 2% shareholders, repeat steps 3-10.
Preventing Negative Checks
OnPay has designed an alternative to the previous procedures regarding the prevention of negative checks when adding fringe benefits to shareholders. Whereas before, we simply reduced FIT and SIT for Shareholder Insurance, or had you add additional pay to cover the taxes when processing your Auto Benefit, we have now designed OnPay so the automatic deduction reduces by the amount of the tax during the pay run to prevent negative checks (you cannot process a payroll with a negative check). This allows all of the taxes to calculate correctly but does not require you to add any additional pay to the checks to cover the taxes.
However, when you complete the payroll and go into the reports section, you will see that the net amounts of the checks become negative. This is necessary as technically, the employee owes the company the money from the taxes that were withheld on the benefit. Most employers simply pay these taxes and do not worry about collecting the funds from the employees.
OnPay will now automatically calculate FIT and SIT taxes on these pay types. Most of the time, employers/accountants do not want FIT or SIT to calculate when reporting these amounts. Please use the following steps to ensure the FIT and SIT does not calculate when using these pay types:
- Start a payroll, update the check dates, and choose the employees receiving either Shareholder Insurance or Shareholder Auto pay types.
- Go to the Enter Hours step.
- Click the button on each employees line, then click the withholding tab.
- Check the boxes beside "Exempt Federal Withholding?" and "Exempt State Withholding?"
- Enter the amounts of either Shareholder Insurance, Shareholder Auto, or both, and process the payroll. No taxes will calculate for Shareholder Insurance, and only FICA and Medicare will calculate for Shareholder Auto.
- Once you have finished the payroll, go back to the pay run, go back to enter hours, go back to the button, and uncheck "Exempt Federal Withholding?" and "Exempt State Withholding?" to make sure Federal and State Withholding calculate correctly on future payrolls.
***FOLLOWING THE STEPS ABOVE DOES NOT REDUCE TAXABLE WAGES, IT ONLY PREVENTS THE AMOUNT FROM CALCULATING AND BEING WITHHELD. TAXABLE WAGES WILL STILL BE INCREASED BY THE AMOUNT OF EACH PAY TYPE USED.
Running the Benefits through OnPay
The last step in making sure you report the benefit on the shareholder's W-2 is to run a payroll using those pay types.
Follow these steps to ensure everything works properly:
- Start your pay run
- Change the check date to 12/31/20XX (last day of the year!) by clicking on any one of the dates at the top of the Select Employees page. Making this 12/31/20XX makes it easier for you to locate this run later.
- While in the menu where you edit check dates, please check the box that states "Hold all employee deductions?" to make sure no deductions calculate on the pay run.
- Choose the shareholders who you have added the "Pay Types" to, and uncheck everyone else.
- Click on the Enter Hours step.
- Remove any salary amounts payable by unchecking the box beside salary, and remove any hourly amounts payable by putting a 0 in the hour's column of those pay types.
- Since OnPay treats the Shareholder Insurance and Shareholder Auto benefits as cash items by default, all you need to do is check the box in the "Hrs" column beside each of those pay items and enter in the amount for each in the Override column. You will see the amounts populate beside each line in the Total column.
- Since the pay types will by default be subject to FIT and SIT, the steps listed above in Preventing Negative Checks should be followed to prevent those taxes from calculating. The wages will still be taxable, but no amount will be calculated or withheld.
- Once you have entered those items, continue to the Review Payroll step of the pay run.
- There you will see that OnPay includes those amounts for each tax as required. As long as you put in an additional amount that will cover your additional FICA and Medicare, we will deduct the amounts back out so the result is a zero check.
Image: Above you see we have added the two pay types as well as enough pay to cover the taxes from the 2% Shareholders Auto Fringe Benefit.
The result of running these benefit pay items through OnPay is that we increase the taxable wages in Box 1, Federal Income Taxable Wages, and Box 16, State Income Taxable Wages (where applicable) for the Shareholder Insurance and Shareholder Auto. We also increase boxes 3 and 5 for Shareholder Auto, and add the information into Box 14 notes explaining why Box 1 and 16 are different than Box 3 and Box 5.
Image: Above you see we have made it to the review screen of the fringe benefits pay run. You see the benefits going in, being taxed, and being deducted back out. OnPay reduced the deduction amounts (only temporarily) to cover the tax liability for the Shareholder Auto and have prevented a negative check.
When you go into the Payroll Register to view the payroll you run, you will see the net amount of the check is zero. That indicates the amount of taxes for the shareholder will be paid by the employer since there are no wages to deduct the taxes from.
Image: In the example above the amount the shareholder technically owes the employer is $85.50. Most employers do not attempt to collect these funds from the shareholder.
You should always consult your accountant before adding these benefit amounts for shareholders. If you have any questions, please give our Client Experience team a call at 877-328-6505.