2% S Corp Shareholder Insurance

[Medlin Software, Dennis]

Enforcement is being stepped up.  What I mean is states (IN recently) are ruling and going after employers who are not withholding tax on the insurance premium.  (Most handle by adding the annual amount to the W2 as described by the IRS and many/most states.)  The enforcement change is not employee based, but is caught under audit of the employers. Even though, the WH ends up being a wash (via credits), the tax entities want the money up front (wise owner/employees already properly manage their tax deposits via W4 and/or personal payments).  I found one reference where an employer was in trouble for not withholding or reporting the insurance amount, even through neither the employee or employer took the deduction!  A penalty on zero...

At first, I thought I had "missed" something, in the way we were doing what our customers asked (to just allow alteration of the EOY forms).  As of today, I see many are still doing the same, asking for EOY figures only, not withholding on a per payroll basis.  Not that this means I was correct, but only I was not the only one wrong...  (Background, this all started with IRS notice 2008-1, the double dip prevention tool, where the amount was pushed to the W2 for compliance purposes.)

When pondering what to do, I see there are important collateral issues.  The insurance amount could be wages for garnishment calculations and WC calculations, among other things... (with some possible exceptions).
 

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[JohnH]

That's interesting information. I always thought one of the main reasons IRS wants the calculation is to avoid unequal distributions when there are significant age differences between shareholders.  But now I see that the states also have several other axes to grind.  

[Medlin Software, Dennis]

My impressions, after a day of delving, is I doubt it is an IRS issue being pressed.  (Although, I found one reference saying any insurance is taxable, including WC, disability, etc.)  IRS would only gain the penalty, not additional tax income, since there is offset available.

States, meh, as they probably have offsets too.  If caught, might gain a little on some sort of FTF or failure to report properly penalty, no profit on uncollected tax, since the collected and offset would wash.

But, local agencies, like Indiana County Tax, have profit to be made, as they are likely not to offer offset!  This could be very profitable to proactively audit, and very easy to catch.  Like states who profit from not indexing their withholding, or by offsetting against the lessening amount of FWH, some local wonks have figured out there is money to be made sticking to the "remuneration" definition of wages, versus some variant of state or federal taxable wages.

One customer has already responded they want to keep as is, since their clients do not report the amount until EOY.  Many "names", at present, suggest reporting the same as most do now (just alter the EOY forms for taxable wages, withhold nothing on the insurance benefit).  The problem with "as is", is it is clear the amount should be used for at elast some withholding calculations, and even if one did that, at EOY, an EOY year catch/even up may not have enough income to cover the WH, and could cause income shifting or under deposit penalties based on timeliness (monthly, quarterly, every payroll, whatever).

Looks like I will be suggesting the easiest, annual divide by paydays, add to taxable on each check, with an even up test/review before the end of each quarter.  What I might personally do, I I were to handle one of these, is a once a month or quarter amount, provided there is enough income.  Interestingly, the same customer says they have many clients who do not even pay their employees (themselves) on a regular basis, despite regular year round effort at work, because of income flow.  Nice double up on audit, minimum wage/minimum pay frequency/tax shifting, and under pay on insurance benefit amount!

 

 

[JimTaxes]

can you have it as an option... new method vs existing method and let users make the decision how to handle it

[WITAXLADY]

When we put the W-2's into ATX payroll program - we are "correcting" it from Medlin - as you are correct - we cannot get your program to generate it as we need it to be.

And we generally add it at year's end... as they pay the health insurance on their own all year to the insurance agency as lump sum for all employees covered and then have to break it out for the 2% shareholder..

So being able to add it in as you mentioned it in your original post sounded very workable to our style. and possibly saved much retyping!

D

[Medlin Software, Dennis]

14 hours ago, JimTaxes said:

can you have it as an option... new method vs existing method and let users make the decision how to handle it

There is always some ability for the user to override the software.

[Medlin Software, Dennis]

12 hours ago, WITAXLADY said:

When we put the W-2's into ATX payroll program - we are "correcting" it from Medlin - as you are correct - we cannot get your program to generate it as we need it to be.

And we generally add it at year's end... as they pay the health insurance on their own all year to the insurance agency as lump sum for all employees covered and then have to break it out for the 2% shareholder..

So being able to add it in as you mentioned it in your original post sounded very workable to our style. and possibly saved much retyping!

D

What are you having to change at present?

Paying all year, with the recent ruling as an example, would require adding to wages and withholding all year...

[Medlin Software, Dennis]

After research and feedback...

www.in.gov/legislative/iac/20180131-IR-045180035NRA.xml.pdf
"... the Department found that Taxpayer paid "health insurance premiums" on behalf of four (4) shareholder-employees..."
"The audit further found the Taxpayer did not withhold Indiana and county income taxes on those payments. As a result, the Department assessed additional withholding taxes, interest, and penalty."

As covered in Pub 15, the amount is clearly taxable wages for FWH.  Likely for many/most SWH.  If the shareholder wants to be covered, as a deductible expense, for WC, the WC is also taxable income. per Pub 535.  Timing?  Every paycheck seems to be reasonable, since no other wages (the employee "is" being covered all year) can be reported at end of year if given earlier.

Simply put, for the employer, whether or not the employee later receives a credit has NO BEARING, and the shareholder insurance must be used for withholding calculations.  The side effect is, unless exempted, must also be included as taxable wages for other things, such as garnishments, local taxes, retirement percentage calculations, etc.

This actually makes sense if you forget (and again, impossible for those who have a tough time not thinking only as the employer) about the employee side of the issue, and pay attention only to the fact the shareholder insurance it taxable wages (with some narrow exceptions).

(And I must hedge my "bets" just in case there is some yet unknown to me exception which will come to light.)

[Abby Normal]

Shareholder insurance is taxable wages but you subtract it right back out as SEHI, so it doesn't make sense to withhold taxes on it and give the government an interest free loan.

We add to last paycheck in December and don't increase fed or state withholding. My withholdings are my business and I have enough withheld to avoid underpayment penalties.

[Medlin Software, Dennis]

1 minute ago, Abby Normal said:

Shareholder insurance is taxable wages but you subtract it right back out as SEHI, so it doesn't make sense to withhold taxes on it and give the government an interest free loan.

We add to last paycheck in December and don't increase fed or state withholding. My withholdings are my business and I have enough withheld to avoid underpayment penalties.

Taxes and "makes sense".  Funny

You must separate the shareholder/employee from the S Corp/employer.  It is not the obligation of the employer to know or handle any part of the emplyoee's tax return.  The employee controls their withholding via the W4.  The employer honors that (or faces penalties).  No verbal adjustments, or other adjustments because enough is already withheld is allowed.

This is the "rub".  All the current advice I can find is from the tax return perspective.  There is little or maybe even no "hard" advice from the employer/payroll perspective.  The Indiana case makes the tax return perspective untenable for the employer to rely on.  Plus, there may be other taxes/deductions which do not offer a credit.deduction later, such as a local tax, garnishment (the insurance is part of disposable wages), alimony/CS calculations, etc.

I 100% get most here are not on the payroll processing/employer perspective, but you could end up with a return from an S Corp client, and who could be subject to penalties from not withholding properly (even if for themselves, again, have to separate the two "entities" the one person may have).

I can see this as another add on to the "reasonable wage", "meeting pay frequency no matter the income flow", and other similar issues those who are the owner and employee have to deal with.  It is tough to always treat the employee self as if that part of the person was a stranger to the owner self.