For 2% (or more) shareholders of an "S" election corporation (S-Corp), certain fringe benefits are taxable. These include company-paid health insurance, company HSA contributions on behalf of the shareholder, and company-provided vehicles.
The amounts paid by the company for these fringe benefits will need to be added to OnPay so that shareholder W-2s are accurate at the end of the year. OnPay makes this easy by providing pre-built pay types for Shareholder Insurance, Shareholder HSA, and Shareholder Auto.
What we'll cover
- Shareholder taxable fringe benefits
- Ways to run these benefits
- Shareholder taxes paid by the company
- Shareholder taxes paid by the shareholder
- Adding the benefit deductions in OnPay
- Making the shareholder exempt for Federal and State withholdings
- Resetting payroll settings for regular pay runs
Shareholder taxable fringe benefits
For 2% shareholders, company-paid health insurance and HSA contributions are only subject to Federal and State Income Tax (where applicable). Personal use of a company car is subject to all employment taxes.
If you would like the taxes withheld from the shareholder-employee, you'll need to run the shareholder pay items with a regular paycheck. If there are no more regular payrolls for the year, the shareholder pay items can be run in a special pay run.
Ways to run these benefits
You can run the shareholder insurance, HSA, and auto benefit deductions in a few ways, depending on whether or not you know what the annual amount will be, as well as who is paying the taxes. Tax responsibility can fall on either the shareholder, or the company (we'll cover this next).
If you know what the annual amounts are going to be, you can report the deductions incrementally with each payroll you run. This method avoids having to set up Federal and State tax exemptions in OnPay.
However, if you do not know the exact amount, you will need to run these deductions all in a single payroll. To do that, you will first need to set up tax exemptions (we'll cover this later). But the first step is deciding who pays these taxes.
Shareholder taxes paid by the company (taxes paid are income)
If your company wants to cover the shareholder's share of taxes, you do not need to change shareholder-employees to exempt. However, this means that the employee would also have to claim the taxes paid by the employer as income.
Shareholder taxes paid by the shareholder (Fed/State tax exempt)
If the shareholder will be responsible to pay the taxes owed, you will need to mark them exempt from Federal & State taxes for this payroll only.
Using the improved pay run?
We've recently upgraded the pay run experience, making it simpler than ever, and it's available for free to all clients. The following instructions are for our Classic Pay Run. If you need to add benefits to a 2% shareholder's Form W-2 using the improved pay run, we'll show you how→
Instructions for Classic Pay Run
Adding the benefit deductions in Payroll
Click the Payroll menu on the left.
Select which shareholder(s) should have the taxable benefits added.
At the top of the payroll page, you find your current payroll settings. You can click on any of them to edit.
Select "Hold all employee deductions?" and click OK.
Note: If needed, the period start and end dates for this payroll can be edited in this window as well.
Continue to "Enter Hours".
Click the expand button below each shareholder-employee.
Search for the pay item you need to add (Shareholder Insurance, Shareholder HSA, Shareholder Auto) and click + Add Item.
These shareholder pay items will now be available for this employee for any pay run. To include them in this pay run, check each one, and enter the amount in the "Override" column.
Making the shareholder exempt for Federal and State withholdings
In the expanded check details, click Withholding. Select "Exempt for Federal and/or State Withholding".
Click Review Payroll.
You may see a warning.
This is typical for an off-cycle pay run.
When you're ready, click Approve Payroll.
Important: Once you have completed this pay run, you must uncheck the "Exempt" withholding fields for these shareholder-employees to ensure that Federal and State Withholdings will calculate correctly on future payrolls.
Resetting payroll settings for regular pay runs
Return to Run Payroll.
Click the pay run settings again.
Make sure "Hold all employee deductions?" is deselected.
Select the same shareholder-employees as before, and click Enter Hours.
Return to Withholding, and deselect "Exempt for Federal and/or State Withholding" for each employee.
You are now set up for your regular pay run.
You should always consult your accountant before adding these benefit amounts for shareholders. If you have any questions, give us a call at 877-328-6505, or email us at email@example.com.