As I’m sure many of you know, 2% shareholders have their health insurance reported as Box 1 wages, and then take the SEHI deduction to effectively zero out those wages for income tax.
Box 1 wages are subject to withholding, but it is clearly silly to remit income tax in payroll that IRS will not keep because of your SEHI deduction. Interest-free loans to the government are a bad idea.
Ergo, I would like to arrange my W4 with the payroll service (I use Gusto, if it matters) such that my net withholding effectively ignores my health insurance as taxable income while payroll correctly withholds income and FICA taxes on my cash wages. Is this possible and how is it done?
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You add the health insurance amount as “other deductions” on the w4.
This ignores it for income tax. It doesn’t ignore it from fica taxes, as you really do still pay fica taxes on this income. It’s only deducted before figuring income tax on the 1040.
If you’re paying FICA on your 2% shareholder health insurance you’re doing it wrong. From S-Corporation Compensation: “However, these additional wages are not subject to Social Security, or Medicare (FICA), or Unemployment (FUTA) taxes”
I stand corrected.
To adjust your withholding for the fica side, you would add an amount in section 3 that equals your anulized fica tax over payment.
How are you handling the withholding on your business profits though? You could just reduce your estimated tax payments on your profits by that amount.
Thanks for the section 3 tip, that’s great.
In my case adjusting estimated tax payments on S-corporation profit distributions wouldn’t work because I’m trying to maximize Roth 401k contributions (elective deferrals). Such contributions can only be done through payroll, which excludes profit distributions, and being paid from net after-tax wages are impacted by unnecessary withholding.
Ah, so your business has no profits at year end? All profits are being paid as salary or put into the 401k?
In that case, you’ll be fine with withholding as long as you set up the 2% shareholder health insurance properly in Gusto. It will exclude it for fica. Then add the adjustment to other deductions on your w4.
If you set it up this way in Gusto, it will take care of this pre paycheck; not withholding any fica taxes on the wages. This is the best option.
I would talk to your CPA and payroll company. An s corp requires reasonable pay so you’re paying social taxes on yourself. Be careful trying to game the system.
I don’t see what “reasonable compensation” has to do with the question.
Gaming the system? I’m paying every cent of tax owed, this isn’t a tax evasion scheme. I just don’t want to overpay withheld taxes. No business owner should.