For 2% (or more) shareholders of an "S" election corporation, certain fringe benefits you receive are taxable. These include company-paid health insurance, company HSA contributions on behalf of the shareholder, and company-provided automobiles.
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 who is paying the taxes, and whether or not you know the annual amount will be. 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. In this case, you do not need to set up Federal and State tax exemptions. If you do not know the exact amount, you will need to run them all in one payroll. In this case, you do need to set up tax exemptions (we'll cover this later).
Shareholder taxes paid by the company
If your company wants to cover the shareholder's share of taxes, you do not need to change shareholder-employees to exempt. However, this does mean that the employee would also have to claim the taxes paid by the employer as income.
Shareholder taxes paid by the shareholder
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.
Adding the benefit deductions in OnPay
Click Payroll in the menu.
Select the shareholders who need 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 firstname.lastname@example.org.