This article explains where to find pay types for benefit contributions paid — Shareholder Insurance, Shareholder HSA, and Shareholder Auto — and how to add these pay types to a pay run. These pay types are designed calculate the taxable amounts you enter for each employee when you process the pay run. These amounts are then used to generate the employee's W-2 for the tax year. For this reason, it's important to process this pay run before the end of the year.
Why is this important?
For 2% (or more) shareholders of an "S" election corporation (S-Corp), certain fringe benefits are taxable. This includes company-paid health insurance, company HSA contributions on behalf of the shareholder, and company-provided vehicles. Taxable amounts for such benefits must be processed through payroll to be included in shareholder W-2s at the end of the year.
Benefit amounts must be processed through payroll during the same tax year
While the amounts paid by the company for these fringe benefits are not in the form of cash wages, the taxable amount must be processed as a pay run on or before December 31 of the same tax year.
If you need to retroactively add 2% shareholder benefits to employee W-2s after the new year, these amounts can only be added by submitting a support ticket to request a tax adjustment.
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 process these benefits
You can run the shareholder insurance, HSA, and auto benefit deductions in a few ways. Which you choose generally depends on whether 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 (considered 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 legacy pay run?
The following instructions are for the current version of OnPay. If you need to add benefits to a 2% shareholder's Form W-2 using the legacy pay run, we'll show you how:
Adding the benefit deductions
Click the Payroll menu on the left to get started.
At the top of the payroll page, you find your current payroll settings. Click to edit.
Select Hold all employee deductions.
Note: If needed, the period start and end dates for this payroll can be edited in this window as well.
Exit payroll settings.
Select which shareholder(s) should have the taxable benefits added.
Tip: If fewer than half should be included in this run, save time and deselect all at the top.
Click the pencil to edit "Wages" for the selected worker.*
*You can only edit wages for selected workers. Pay items of other workers are in no way affected by the changes made to this worker's pay items, or pay rows.
If you don't see the shareholder pay item(s) you need, click Add/Order Pay Rows to add, remove, and rearrange pay item rows for this worker.
Click Add Row.
Search "shareholder" to find these pay items, and click Add Row.
Add as many rows as you need for this worker. Drag rows to rearrange them. Adding pay rows does not automatically include pay amounts in this or any run, so it's okay for workers to have pay rows that aren't always used.
The amounts added to pay rows only apply to the current pay run. Non-recurring pay rows are always empty until an amount is entered.
Tip: Use the ⇥Tab key to jump to the next field without using your mouse.
Making the 2% shareholder exempt for Federal and State withholdings
In the expanded check details, click More. Select "Exempt for Federal and/or State Withholding".
If there are no other 2% shareholders who need these benefits added to their W-2, click Continue To Review. Otherwise you can use the Next button in the upper right (or ALT + Left Arrow on your keyboard) to add these rows and amounts to other 2% shareholders.
Got a warning?
It's typical to see a warning during an off-cycle pay run, because OnPay is always comparing employee paycheck amounts with previous paychecks. If it's off by a significant amount, you'll see this sort of warning.
When you're ready, click Submit Payroll.
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Always consult your accountant before adding these benefit amounts for shareholders. If you have any questions, reach out to us for help.
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