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?

  • Its-a-write-off@alien.topBEnglish
    1·
    1 year ago

    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.

    • bizwig@alien.topOPBEnglish
      1·
      1 year ago

      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”

      • Its-a-write-off@alien.topBEnglish
        1·
        1 year ago

        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.

        • bizwig@alien.topOPBEnglish
          1·
          1 year ago

          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.

          • Its-a-write-off@alien.topBEnglish
            1·
            1 year ago

            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.