What impact does being marked as a >2% S-Corp Shareholder have?
Marking an employee as a >2% S-Corp shareholder in Justworks will prevent the employee from enrolling in benefits that they are not eligible for as a result of their status, such as FSA and pre-tax commuter benefits. In addition, it will ensure that any medical, dental, and vision insurance premiums will be treated as 100% employer-paid by default, to prevent shareholders from having pre-tax deductions applied for these benefits.
Indicating a >2% shareholder’s status in Justworks also enables your company to account for taxation on employer-paid health insurance premiums that are considered imputed income. Each month, the value of imputed income for benefits your company makes available through Justworks will be automatically added to the shareholder’s regular, such that the correct payroll taxes can be collected and remitted.
Additionally, each quarter, we will conduct a reconciliation process to ensure that we’ve accounted for changes in either a shareholder’s status or their benefits costs, resulting from things like qualifying life events.
Due to all these unique restrictions and resulting payment implications, it’s very important that an individual’s >2% S-Corp Shareholder status marked in Justworks actually reflects their status at your company.
What benefits are taxable for >2% S-Corp Shareholders?
The IRS imposes tax on some employer-provided benefits for >2% S-Corp shareholders. In general, >2% S-Corp shareholders may not pay for certain benefits on a pre-tax basis, including Health Savings Account (HSA) contributions, and commuter benefits. Additionally, they must be taxed on certain benefits, such as the value of employer-paid health insurance premiums, employer contributions to an HSA, and employer-provided short- and long-term disability premiums. You may reference IRS Publication 15-B to learn more about the taxability of these benefits and the federal requirements.
What happens if a >2% S-Corp Shareholder status is updated in the middle of the year?
Admins can update an individual’s >2% S-Corp Shareholder status directly on their profile at any time during the year. However, please note that, in accordance with IRS guidance, this status applies for the entire year regardless of the date the status is applied.
If the employee has been enrolled in any employer-provided benefits that they are no longer eligible for (e.g. pre-tax health insurance), our Customer Success team will be in touch to calculate and debit for any applicable year-to-date taxes owed. Moving forward, at the start of each quarter, an automatic adjustment will be made to reconcile the taxes on the value of benefits contributions where applicable, which may result in a debit or credit to the company.
If the employee was previously indicated as a >2% S-Corp Shareholder, but their status is changed such that they are no longer one during the calendar year, this will also result in changes to their benefits eligibility and taxation.
Either of these changes may require reconciliation and could result in debits or credits back to the company and/or employee. You may read more about adjustments on this page.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.