w-2 wages/paycheck help please - specialist please

[WITAXLADY]

Mind is froze..

In order to contribute to an IRA - must have $7,500 in wages in box 1 -

For a 2% S corp shareholder - whose health insurance is $4,000 can their wage only be $3,500 to equal $7,500 or does it need to be $7,500 + $4,000 = $11,500?

 

Thank you,

D WI

[Medlin Software, Dennis]

Unless the shareholder rarely participates, the wage amount you are referring to seems a bit shy for RC. HI more than wages gets my attention too. Many shareholders neglect to consider for their employee/officer type efforts, they need to be paid at least min wage, for all hours worked, on a regular basis (not the one a year or once a quarter garbage, except in a few states with no pay freq requirement). And the HI should have been pro rated and shown on every paycheck, not just added in for end of year (constructive receipt of the HI benefit).

But, ignoring shenanigans, Box 1 = Box 1, however it came to be.

[Lee B]

1 hour ago, WITAXLADY said:

Mind is froze..

In order to contribute to an IRA - must have $7,500 in wages in box 1 -

For a 2% S corp shareholder - whose health insurance is $4,000 can their wage only be $3,500 to equal $7,500 or does it need to be $7,500 + $4,000 = $11,500?

 

Thank you,

D WI

Technically, I agree with Dennis. However if your client depends on distributions of profit for their month to month living expenses then you have a reasonable compensation problem which would cause me to terminate the client unless they actively increased their wages!

 

[Medlin Software, Dennis]

Hard to argue RC is met if dist is used for day to day. So silly, the RC game. Those that play are likely served best taking wages up to the ss limit, if they have the option. 

[kathyc2]

I attended a webinar hosted by an ex IRS agent recently.  She said ALL S returns with zero or low shareholder wages are flagged by computer for an eyes on review.  First agent can accept return as is or send it for further review.  It then goes through a couple more people to decide if it gets audited or not.  

If SH is taking large distributions and essentially no wage, chance of it being audited are increased.  IMO basing wage on IRA amount is borderline fraud.  Proceed with extreme caution if you are in any way condoning or advising on doing this. 

[Lee B]

I think using the word "fraud" may be a little excessive

[Catherine]

Facts and circumstances. RC is a big issue, yes. However, it's not a huge issue for a small S-corp without big distributions. A corp in its first few years may well be just barely scraping by. In which case I'd look at IRA limits based on spousal earnings rather than S-corp earnings. No one can put all their $ into an IRA unless they have a working spouse with a good job - or are taking distributions instead of wages. For the latter, you have an RC issue for sure. 

[WITAXLADY]

FYI - Their wages in box 3,5 are an additional $15,500 or $19,000 as they are putting that in their SIMPLE..

Just trying to determine if box 1 for an IRA has to be the IRA amount of $7,500 plus the HI amount or if the IRA amount is enough and the HI is part of that..

 

Most of these are smaller S corps, either with other income or close to or are retired.

[Lion EA]

https://www.irs.gov/publications/p590a#en_US_2022_publink1000230357

Wages, salaries, etc. 

Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). A scholarship or fellowship is generally taxable compensation only if it is in box 1 of your Form W-2. However, for tax years beginning after 2019, certain non-tuition fellowship and stipend payments not reported to you on Form W-2 are treated as taxable compensation for IRA purposes. These amounts include taxable non-tuition fellowship and stipend payments made to aid you in the pursuit of graduate or postdoctoral study and included in your gross income under the rules discussed in chapter 1 of Pub. 970, Tax Benefits for Education.

[WITAXLADY]

Thank you all..

I did read the Pubs - 15b, etc

This is a special rule to add back the 2% shareholder's health insurance to the box 1 wage.

Just trying to determine if it can be just $7,500 and that takes care of the IRA And the amount of HI..

Thx d

 

[Medlin Software, Dennis]

13 minutes ago, WITAXLADY said:

Thank you all..

I did read the Pubs - 15b, etc

This is a special rule to add back the 2% shareholder's health insurance to the box 1 wage.

Just trying to determine if it can be just $7,500 and that takes care of the IRA And the amount of HI..

Thx d

 

Not a special or new rule, the proper reporting of the shareholder insurance.  It started with IRS notice 2008-1. The rub, what most people do not figure out is 2008-1 was all about the W2 to prevent double dipping. The consequences, which I have not seen documented officially - and something I have been arguing for many years - is the amount it wages, and needs to be reported as constructively received.  Many accountant types believe adjusting the W2 is all that is needed, which may not cause issues, but as wages, it is not a once a year deal.