QBI question regarding W-2 wage definition

[SteffanW]

My total compensation was $162,000 for 2022.
A) Box 1: $141,500 ($162,000 - $20,500 = $141,500).
B) Box 3: $147,000 (wage base cap)
C) Box 5: $153,110.68 ($162,000 - $3,650 (HSA) - $5,239.32 (>2% shareholder insurance) = $153,100.68) as S Corp medical is exempt from SS, MC, and SDI.
D) Quarterly salary inclusive of insurance and HSA would be $38,277.67 [($162,000 - $3,650 - $5,239.32) x 25%] = $38,277.67). Annual salary was $153,110.68
E) Both HSA and >2% Shareholder health insurance represented in Box 14

When placing the amount for W-2 wages in the QBI, my accountant used $162,000. I'm wondering if wages should have been $153,100.68 (excludes HSA and insurance) or $162,000 (includes HSA and insurance).

[SteffanW]

::Bump::

[SeattleCPA]

I think your accountant did the W-2 wages bit correctly. He or she used the first method described by the IRS in its guidance here: https://www.irs.gov/pub/irs-drop/rp-19-11.pdf

[spiritrider]

Steve,

While $162,000 was the correct QBI wages for the W-2 as completed.

Didn't the CPA err by not including the $3,650 HSA contribution and $5,239.32 healthcare insurance in W-2 Box 1 wages.

Also, we don't know if the CPA included the above in Form 1120S Line 7 Officer compensation, Form 1040 Schedule 1 HSA and SEHI deductions.

[SeattleCPA]

Steve,

While $162,000 was the correct QBI wages for the W-2 as completed.

Didn't the CPA err by not including the $3,650 HSA contribution and $5,239.32 healthcare insurance in W-2 Box 1 wages.

Also, we don't know if the CPA included the above in Form 1120S Line 7 Officer compensation, Form 1040 Schedule 1 HSA and SEHI deductions.

Maybe I'm reading SteffanW's post incorrectly. But it looked to me as if the SE health insurance and HSA are in box 1.

I.e., the way I read this, box 1 equals

The "base pay" of 153,110.68...
Plus the $3,650 (HSA) and $5,239.32 (>2% shareholder insurance)
Minus the $20,500 elective deferral..

The taxable amount then is $141,500?

I'm sure it's just a coincidence, but it almost looks like someone was trying to set their salary to a level that allowed for the max employer employee 401(k) contribution.

[spiritrider]

I'm sure it's just a coincidence, but it almost looks like someone was trying to set their salary to a level that allowed for the max employer employee 401(k) contribution.

I don't believe in coincidences. Just a lack of imagination.

I don't understand why 2% shareholder-employees and/or CPAs invite attention to the fact that they almost certainly didn't derive "reasonable compensation" from legitimate IRS factors.

[SteffanW]

Steve,

While $162,000 was the correct QBI wages for the W-2 as completed.

Didn't the CPA err by not including the $3,650 HSA contribution and $5,239.32 healthcare insurance in W-2 Box 1 wages.

Also, we don't know if the CPA included the above in Form 1120S Line 7 Officer compensation, Form 1040 Schedule 1 HSA and SEHI deductions.

Haha...you guys are scary good. I was hoping to hear from you on this, but I worry about being annoying by tagging you on all my questions. SeattleCPA is correct that the insurance and HSA are accounted for.
Regarding the CPA inclusion of the factors mentioned above: Check, check, check and check.

Warning noted.

Thanks guys.

[spiritrider]

There is no reason to worry about your salary being a few thousand more. You are only talking about an additional $100 in Medicare taxes.

I instead of a $153,110.68 base salary, why not a $156,000 base salary. Depending on your payroll, that is $13K * 12 or $6K * 26.

While I personally don't know of anyone who was targeted for having their compensation exactly match the minimum to maximize 401k contributions. Why have such an obvious compensation.

[SeattleCPA]

I don't believe in coincidences. Just a lack of imagination.

I don't understand why 2% shareholder-employees and/or CPAs invite attention to the fact that they almost certainly didn't derive "reasonable compensation" from legitimate IRS factors.

It doesn't really bother me to set the wages to something arbitrary. I agree it's not perfect. But I read the relevant reg to say employer needs to be reasonable. And to me that's a range not an amount. The reality is, it's probably not possible for a small business to do compensation studies every year for every shareholder-employee.

This is an old story now. But at an IRS tax practitioner symposium years ago, an IRS S corporation "technical issues advisor" for my neck of the woods told the 400 tax nerds in the audience this: He was unaware of any audit in the country where agents were arguing for reasonable compensation above FICA limit. Every CPA or EA in the audience drew the same conclusion.

BTW to be fair and balanced, I will also share something else he said... and that was he thought any one-person S corporation needed to pay 100% of profits as wages. (As I've often pointed out, Congress later nearly passed a tax law change that would have made this the rule for white collar S corporations though not blue collar S corporations. But that's another rabbit hole.)

But the reason reason for this particular commment: What I'd worry about more than setting salary to something sorta arbitrary like the FICA limit or the amount required to max a 401(k) or Simple-IRA? Setting the salary to maximize the 199A deduction.

I.e., if you qualify for 199A but need wages and your wages equal 2/7ths of your profit? Yeah, I wouldn't do that.