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HSA contributions, S Corp owner, and FICA taxes

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  • #16
    I do not have any experience with Gusto, but here are some general issues.

    There are two basic ways this can be handled depending on the payroll company's ability to properly handle S-Corp 2% shareholder-employee health insurance premiums and HSA contributions and how you pay those premiums make those HSA contributions.

    It is very rare for a payroll processing company to not be able to handle health insurance premiums as part of payroll. Usually, there is a way to specifically designate portion of payroll that is for the premiums. Most S-Corps run monthly payroll to make this easier. On each payroll you will want to verify that the premiums were not subject to Social Security SS and Medicare MC. Then you need to make sure they generate the W-2 properly with the premiums included in Box 1 wages and not in Box 3 SS. wages or Box 5 MC wages. It would be the exact same process if they supported HSA contributions, but make sure they report HSA contribution in Box 14 and NOT Box 12. If they report them in box 12 you will have a big problem.

    If they don't support HSA contributions, but do support health insurance premiums, you could do as @beagler asked. Your Box 14 will technically incorrect, if that bugs you, could have the payroll processor not file the W-2 and file your own with the correct box 14 entries. However, at this point in time, your W-2 is already filed and I don't believe you are supposed to file a corrected W-2 for Box 14 entries.

    Some people prefer to make one time contributions to the HSA either from the S-Corp's accounts or directly themselves and get reimbursed from S-Corp accounts and not through payroll. In this case, you must not have the payroll processor file the W-2. You take their prepared W-2, increase Box 1 by the HSA contribution amount, add an appropriate Box 14 entry and file it yourself.

    I realize most of this only helps prospectively. If this is for last year and they included the HSA contributions in Box 12, you will have to file a corrected W-2 to be able to claim the HSA deduction. Also, if they didn't screw up box 12, but included the HSA contributions in Box 3 & 5. I don't know if I would take the steps necessary to get a couple of hundred bucks back, assuming your W-2 Box 5 SS wages were = the SS maximum wage base.

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    • #17
      Originally posted by spiritrider View Post
      Lively is correct that small business owners of pass-thru entities can not receive pre-tax health and welfare benefits. This applies to health insurance premiums and HSA contributions for S-Corp 2% shareholder-employee's.

      However, Lively has made a clear error by omission. You most definitely are able to receive deductions and FICA exemption on these. It just requires s specific detailed process.

      1. The S-Corp pays directly or reimburses the health insurance premium and/or makes directly or reimburses the HSA contributions.
      2. These after-tax payments are reported on the S-Corp's Form 1120s Line 7 Officer Compensation.
      3. They are also reported on the 2% shareholder-employee's W-2 Box 1 wages, but NOT Boxes 3 Social Security wages and 5 Medicare wages.
      4. The shareholder-employee then reports on their personal Form 1040 the Line 25 HSA deduction and the Line 29 Self-Employed health insurance deduction*.

      This effectively makes the health insurance premiums and HSA contributions income and FICA tax exempt.

      * You may only take the self-employed health insurance deduction if you are not eligible for a group health insurance plan of you or your spouse's employer.
      Thanks. Great thread. I should probably be doing this. Not sure I'll bother going back and correcting 2019, but might as well do it this way going forward. Just makes the 941s/W-2s/1120S a bit more complicated in exchange for $203. Nice to know I can still just pay it directly and then reimburse from the business.
      Helping those who wear the white coat get a fair shake on Wall Street since 2011

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      • #18
        as a follow up I can confirm that Gusto payroll handles both health insurance premiums and HSA contributions correctly for S Corp 2% shareholders, without any hassle or manual workaround required

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        • #19
          If someone is a 2% shareholder, why go through contributing to an HSA through the company anyway? Can't they just contribute individually to the HSA and obtain the tax deduction on the personal return? Same result in the end unless I'm missing something.

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          • #20
            Originally posted by nauticalx View Post
            If someone is a 2% shareholder, why go through contributing to an HSA through the company anyway? Can't they just contribute individually to the HSA and obtain the tax deduction on the personal return? Same result in the end unless I'm missing something.
            Hint. Read the thread title. And the thread.

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            • #21
              I forgot to add context-- Isn't the thread assuming all compensation is salary? If one makes enough to where there is distribution reported to them over and above their reasonable salary, what does it matter about taking the deduction personally and avoiding company involvement entirely? This only seems to matter where all compensation is paid as salary or where someone can pay themselves a lower salary by the amount of the HSA contribution.

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              • #22
                I don't see how one is saving FICA unless they are reducing their salary by the amount of the HSA contribution.

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                • #23
                  Originally posted by nauticalx View Post
                  I don't see how one is saving FICA unless they are reducing their salary by the amount of the HSA contribution.
                  As has already been pointed out in the thread HSA contribution amount, and health insurance premium, is included in W2 Box 1 compensation but not box 3 and not box 5. Therefore not subject to FICA. Most docs exceed the SS wage base regardless but will save 2.9%, or in the case of many, 3.8%, with this treatment.

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                  • #24
                    Originally posted by nauticalx View Post
                    I don't see how one is saving FICA unless they are reducing their salary by the amount of the HSA contribution.
                    and yes, S corp 2% shareholder health insurance premiums and HSA contributions are included in "compensation" when you're having the conversation of "what is reasonable compensation"

                    so, if it is deemed you need to pay $300k as reasonable compensation, then yes you only need to pay salary of $300k minus (health insurance plus HSA)

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                    • #25
                      Originally posted by jacoavlu View Post
                      as a follow up I can confirm that Gusto payroll handles both health insurance premiums and HSA contributions correctly for S Corp 2% shareholders, without any hassle or manual workaround required
                      Out of curiosity, were they set up as Gusto-managed benefits? I just reviewed the draft W-2 Gusto generated for 2020 and it has them listed in Box 14 only; they're not included in Box 1. I have them set up as payroll deductions only, and manage them outside Gusto.

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                      • #26
                        Originally posted by brainmelt View Post

                        Out of curiosity, were they set up as Gusto-managed benefits? I just reviewed the draft W-2 Gusto generated for 2020 and it has them listed in Box 14 only; they're not included in Box 1. I have them set up as payroll deductions only, and manage them outside Gusto.
                        not sure what you mean by “gusto managed benefits”. Gusto does not administer our insurance nor HSA. But the insurance and HSA are setup under Benefits in Gusto, identified as Employer contributions, and importantly shareholders are identified as such in Gusto

                        the system then properly includes the amounts as compensation to shareholders but does not include them for FICA

                        the deduction then has to be taken on personal returns

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                        • #27
                          spiritrider not sure if you are a tax professional or not, but if not I would gladly contribute to your side hustle fund to do tax work or just help me arrange my affairs because I’m sure I’ll learn the proper way I should be doing a lot of things. What an asset to the forum.

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                          • #28
                            I am not a tax professional and I am retired anyways.

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                            • #29
                              Originally posted by spiritrider View Post
                              I am not a tax professional and I am retired anyways.
                              thats what john wick said....

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                              • #30
                                Originally posted by Peds View Post

                                thats what john wick said....
                                Peds That is the funniest thing I've read this week

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