Paychex and SCorp officer health ins

[BHoffman]

Client switched to Paychex mid year and did not set up for SCorp officer health insurance.  His total premiums paid by the company were $5700.

I told the bookkeeper to tell Paychex to issue a paycheck with a gross amount of $5700, subject only to Fed and State withholding, and to make sure that $5700 is going to show up in box 14 of his W2 with the SCorp officer health insurance notation.

Paychex payroll journal (pre-finalized) shows that they are not issuing him any paycheck and lists $5700 in a column "Reimbursements and Other Payments".  

We are afraid his gross wage will not be increased since the journal shows nothing for wages or withholdings and there is no net check.

I sent a sample W2 and instructions to the bookkeeper so she could forward the information to her Paychex representative.  Bookkeeper spoke with the rep, and was told that they had this whole thing under control but it doesn't look like it.  I would think that Paychex knows how to handle this common situation.

I've asked the bookkeeper to have Paychex send a YTD report so I can see his gross wages.

Does anyone have any experience with how Paychex generally handles this?  

Thanks!

 

 

 

 

[Lynn EA USTCP in Louisiana]

I have to track these items for my one S-corp client who uses Paychex and give to the Paychex rep, no later than 12/15, a list of the income to be included in only box 1 of the W2 wages, and a breakdown for box 14 (health insurance, medical plan - reimbursements), and I have to also calculate the personal use of the company vehicles to be imputed as W2 wages, boxes 1, 3, and 5, also due by 12/15.  A separate spreadsheet is sent to the Paychex rep for that.

The first year my client used Paychex I instructed them to tell the Paychex rep about these issues, but somehow that 'fell through the cracks'.  This was not discovered until after the 2015 quarterly reports and W2's had been issued by Paychex.  I had to calculate all this for 2015, submit it to Paychex who had to amend the 941's, 940's, SUTA reports and W2's, all for a princely fee.

Bottom line is that I had to be the one to spoon feed the info to the Paychex rep.

 

[Abby Normal]

2 hours ago, BHoffman said:

I told the bookkeeper to tell Paychex to issue a paycheck with a gross amount of $5700, subject only to Fed and State withholding, and to make sure that $5700 is going to show up in box 14 of his W2 with the SCorp officer health insurance notation.

We like to add it to the last paycheck of the year so there's money to pay the withholdings. If you're going to issue a separate paycheck, it has to be a zero paycheck since this is a non-cash income item. We create a pay item called Company Paid Taxes to zero out the paycheck. You have to adjust it several times to get it to zero out and/or adjust fed or state withholding by a small amount.

[mircpa]

Why do you have to make this amount subject to withholding. This is an offsetting entry. $ 5,700 shows on line 7 of 1040 & knocked off on line 29. I don't this amount be subject to withholding either federal or state.

[BHoffman]

Got it straightened out with the Paychex rep.  No withholding, no actual check. All is well.  

[BulldogTom]

Thank you so much for this topic.  I was just trying to figure out in my software at my day job how to do this for my owner.  His Health Insurance is a very large amount and I did not want him to get hit for the Federal and State withholding on his paycheck (his wife would freak if the check was not the same amount this week). 

Issuing a second check with no withholding is the answer.  I can cut his regular check and then a second check with just the non-monetary fringe, suppress the withholding and viola....box 1, box 16 and box 14 on the W2 completed.

Thanks so much for posting this.  Saved me a bunch of time screwing around with the owner's last check.

Tom
Newark, CA

[Abby Normal]

17 hours ago, mircpa said:

Why do you have to make this amount subject to withholding. This is an offsetting entry. $ 5,700 shows on line 7 of 1040 & knocked off on line 29. I don't this amount be subject to withholding either federal or state.

We often don't do any withholdings for that very reason, but I'm just not sure it's technically correct. If the S corp shows a big profit, it's nice to have some extra tax paid in, especially if the client is one that doesn't make adequate estimated payments.

[Medlin Software, Dennis]

Careful.  (Sorry, I was just reading a list of common payroll issues, which triggered the ones I deal with almost daily.)

You should not change withholding from what is calculated using the parameters of the most recent valid W4 form.  Nor should you be showing the 2% shareholder insurance on a paycheck.  The reporting of the 2% shareholder insurance is directed for ONLY the W2 form.  There is no directions (which I have ever seen) saying to alter a paycheck or a 941.  Now, many will argue the 941 MUST be altered so the 941 totals match the W3, but that is false.  941's do not have to match the W3... they can, and usually will, but it is not required, with some of the exceptions listed in the instructions.  When they do not match, the only requirement is to keep documentation showing why they do not match.  The IRS bulletin requiring the W2 adjustment for shareholder insurance says nothing about altering paychecks or 941 forms, or 940 forms.  Keep in mind, the reason for reporting shareholder insurance on the W2 is to try to catch double dipping.  Nothing more, nothing less.

Many ignore my advice, as well as the actual reporting directions, so I have "given up" the "fight", but my information is still correct until proven otherwise.

The other OFTEN missed complication for shareholder insurance is ACA.  Many fail to heed the rule that the owner/employee must have coverage through a qualified ACA group plan when anyone other than the owner/employee (a few rare exceptions, such as for a spouse) is being provided or compensated for health coverage.  Not ACA compliant?  The health insurance payments are simply taxable income to all.  Not ACA compliant means no shareholder reporting is allowed.  ACA compliant group plan can still be confusing as the company is still paying for the owner insurance through the compliant group plan, but many say it still must be reported via the shareholder W2 changes required by the old IRS bulletin.  (Probably not harmful to do so.)  Having two "rules" interact this way is not unusual, but certainly is complicated.

One other item I too often see is an owner/employee who fails the reasonable compensation issue, such as paying themselves randomly, quarterly, or annually.  Employees, even owner/employees, must be paid at least as often as the state requires, and a reasonable amount for the time worked.  Some states have no frequency rules, but I used to recommend paying at least monthly, to avoid the IRS claiming tax shifting.  I have given up on this one as well, since the odds of getting caught are not great, and those that do get caught do not share the news.

[Medlin Software, Dennis]

P.S. With payroll, no good deed goes unpunished.  Increase WH to save the employee from penalties?  The employee may make their own deposit, then gripe at you for what you did.  Also sets you up for personal liability since you exercised personal control over the WH amount, instead of blindly following the W4 and Pub 15 instructions/calculations.  Adding exposure for doing more or less than required is not wise.

[BulldogTom]

Thanks for your advice.  In my case, the software provider we use for payroll recommends adding the non-cash fringe to the final payroll check to bring the W2's in line.  The corporate CPA has already calculated the estimated taxes for the owners, who have other interests outside the S Corp.  The estimates have been made timely.  The owner salary is reasonable (I wish I made that much on my paycheck).  I am not worried that there will not be enough withheld for taxes, I was worried that the owner's wife would call me on the carpet for a paycheck that was not the normal amount.

I am wary of the IRS.....I am more fearful of the owner's spouse.

Tom
Newark, CA 

[Medlin Software, Dennis]

Not my fight... see my reference to arguing in a post from yesterday.

But, I cannot resist... your software provider is acting incorrectly.  Adding the amount to a paycheck is done to allow the software provider to create a proper W2 without having to program the proper way.  But, the problem is, it causes inaccurate paychecks and paycheck records.  At best, they jump through some programming hoops to show the "amount" as income, and somehow not tax it for any purpose.  Those hoops are much more complicated than allowing a dollar entry which only affects the W2.  For me, we allow the amount to be set on the employee's record, and read the record when creating the W2.  That way, no one has to FUDGE a paycheck.  Unless the software provider is also providing tax advice, and taking on the liability for their advice, their advice has no more value than something :the internet says".  I suspect the advice holds as much water as calling the IRS and getting advice from whomever answers the phone.  (The "whomever answers the phone" is something I have come up against several times in several scenarios.)

To end with a positive, one state WH office had posted tables, but no calculations for 2017.  Useless for most.  I asked what was up, and they not only replied, they updated their web site withing minutes.  Sometimes you can reach someone who can do something, and even better, has the common sense to take the action.  They could not post the calculations, but added a statement that using the 2016 calculations was fine for a short time, since any change was minimal.  (The problem is there appears to be no change at the no allowance level - the raw rates - but something is definitely funky about the allowance columns.)

[BulldogTom]

3 hours ago, Medlin Software said:

But, I cannot resist... your software provider is acting incorrectly.  Adding the amount to a paycheck is done to allow the software provider to create a proper W2 without having to program the proper way.  But, the problem is, it causes inaccurate paychecks and paycheck records.  At best, they jump through some programming hoops to show the "amount" as income, and somehow not tax it for any purpose.  Those hoops are much more complicated than allowing a dollar entry which only affects the W2. 

You hit the nail on the head about the software provider.  There is another way to do it in their documentation, but it requires multiple steps, and they recommend the check method in their documentation.  We create a non-cash fringe earnings code in the software, and uncheck all the subject to boxes for FICA, SUTA, FUTA and WC.  Then we tell it to include the amounts in Box 1 & 16 on the W2 and explain it in box 14.  When the check runs, it should subject the earnings to Fed and CA withholding but nothing else.  Again, as you said, we ignore the W4 and disable Fed & CA withholding when we cut the zero dollar check.

I know you think it is wrong, and you are probably correct.  But the effect is to get the W2 to say what I know it is supposed to say.  And I know that I should be subjecting this to WH as directed by the W4, but I also know that the owner pays his estimated taxes and the CPA will ensure that the owner is not in a penalty situation.  It looks like "the ends justify the means" to me.  The IRS gets a W2 the way they want it and the wife of the owner does not have a reason to pick up the phone and bitch at me.

You are a pretty smart cookie.

Tom
Newark, CA 

[Medlin Software, Dennis]

Tom, I get it.  I might even be inclined to do what you are doing, provided I had some written documentation allowing me to do so (a notarized letter from the owner/employer might do it).  The end result is probably the same, the road to get there is where it gets sticky, and if called on to prove out, will get stickier. All "defense" is a loss since defense is rarely free or reimbursed.  I am just too far along in career and life to take the same chances as when younger/newer.  A nod from an owner/employer they want me to withhold or do something which I cannot back up via the regulations, without documentation stating I was forced to do so against my advice, and I am not doing it.

Notice 2008-1 (IRS) was clear about what needed to be done, and why, and it does not say to alter a paycheck, to withhold taxes, or to alter a 940 or 941.  It only covers including the amount in certain places on a W2.

I could avoid answering a large number similar emails each year if there were updated instructions from the IRS (to me, 208-1 is clear, but not all agree).  Unfortunately, there is no reason for the IRS to do so.  The common question I get is "someone" told my customer it has to be wages, and has to show up on a 941 and 940, and that the 941 forms MUST equal the W3 (which are all incorrect as best I can tell, and I am willing to be shown anything to the contrary, since I cannot find such information myself).

Smart?  Well if you consider the school of hard knocks, plus knowing how to use a search engine, as smart, sure, I can usually find what I am looking for even if not what I was expecting to find.  The real smart part, as I have learned along the way, is first realizing I could be wrong, and then to remain open to that possibility.  After several years of my position on the shareholder insurance, no one has been able to show me anything contrary, but I am still looking and asking...

I did not even want to add the ability to handle the shareholder insurance when 2008-1 came out, since it is something which cannot be tracked through a paycheck.  But, too many customers are 2% shareholders, so I had no choice.  I tried to find logic to allow it to be part of a paycheck, and am still looking.  I really do not like untraceable "adjustments" - since I will eventually take the heat when a customer asks why a W2 has an amount which was not part of paychecks when they forget the reason themselves, and insist they did not make the adjustment.

 

[Lion EA]

I have one client for whom I prepare the S-corp return, but they have their own bookkeeper and use Paychex.  Paychex has a code for >2% shareholder HI.  Each December, the bookkeeper runs a QB report for the HI and checks with the owner re any open HI invoices he will pay that month and then gives the amount to their Paychex rep.  I don't prepare his personal taxes, but do communicate with his personal CPA, so have heard that all is well using the Paychex procedure.