thepensionmaven

Sub S shareholder "wages"

Recommended Posts

Employer maintains a profit sharing plan, no employees.

Box 1 of his W-2 includes health insurance premiums; boxes 3 & 5 do not.

Employer wants max deduction (and who doesn't?)

Would his 25% be based on Box 1 or Box 3?

Accountant seems to think Box 3.

Share this post


Link to post
Share on other sites

I assume your question really is are you allowed to include the taxable health insurance premiums (assuming the plan is using total comp, for our discussion).

The answer is an absolute YES; in fact, if you fail to include it, you are using the incorrect compensation for plan allocation purposes.

So, assuming no plan restrictive language, the accountant is wrong.

Share this post


Link to post
Share on other sites

Larry is correct. For DC allocation purposes use Box 3 or Box 5 Medicare Wages. Box 1 excludes taxable fringe benefits. I learned the hard way on this one....

Share this post


Link to post
Share on other sites
1 hour ago, pensionLifer said:

Larry is correct. For DC allocation purposes use Box 3 or Box 5 Medicare Wages. Box 1 excludes taxable fringe benefits. I learned the hard way on this one....

Huh, that is the opposite of what Larry said.

Technically, it is W-2 Box 1 which should include health insurance premiums and HSA contributions if paid or reimbursed by the corporation, plus Box 12 Code D (401k) or Code S (SIMPLE IRA) deferrals.

Box 5 Social Security Wages could be limited to the maximum wage base and neither Box 5 nor Box 3 Medicare Wages include the above compensation.

Share this post


Link to post
Share on other sites

What does the payroll report list as YTD gross compensation.  I'd go with that.

  • Like 1

Share this post


Link to post
Share on other sites

yes, absent any specific plan language that would exclude the taxable portion of medical premiums.

Share this post


Link to post
Share on other sites

What is the definition of compensation in the plan document?

If the document says w-2 plus deferrals: you are taking box 1 and adding box 12 DD amounts (deferrals).  However, the SBJPA of 1996 defined deferrals as any amount contributed under a section 125 plan.  Most medical plans and flex benefits are section 125. You would need to add them to box 1 too.

So assuming that the plan does not exclude any compensation, I'm with BG5150, use the YTD payroll report.

Share this post


Link to post
Share on other sites

I usually find that box 5 includes the 401(k) but not the SubS health, while box 1 has the SubS but not the 401(k).  So it ends up being neither number.

Share this post


Link to post
Share on other sites
21 hours ago, pensionLifer said:

Larry is correct. For DC allocation purposes use Box 3 or Box 5 Medicare Wages. Box 1 excludes taxable fringe benefits. I learned the hard way on this one....

First, what I said was correct.  However, now it looks like we need to explain how the boxes on a W-2 work.

Box 1 shows the taxable income.  Therefore, it won't include, for example, 401(k) deferrals or FSA contributions.  It should include taxable medical premium for an S shareholder, so in our original example, it appeared that box 1 was bigger than box 3 or 5 because the medical insurance is not subject to social security taxes and therefore is not included in SS or Medicare wages.  In THIS PARTICULAR SITUATION, box 1 was the biggest and should be the one that was used.

However, in many cases that is not true.  For example, if this individual had deferred the max 401(k) amount (and assuming the health premium was less than that amount), box 3 would be bigger than box 1, but still wouldn't be the right answer.

The correct answer is that you need to take the total income paid and then ADD any taxable fringe benefits to that amount.  So, you are including use of a company car, 401(k) deferrals, flexible spending account contributions, and health insurance premiums for S shareholders.  Thus, you can never just depend on the W-2; you need to ask if there are any of those additional items that need to be added to the compensation figure.

Hope that is clearer for everyone.

Larry

Share this post


Link to post
Share on other sites
9 minutes ago, msmith said:

Applies only to more than 2% Shareholders - correct?

You got it:

Treating Medical Insurance Premiums as Wages. Health and accident insurance premiums paid on behalf of a greater than 2-percent S corporation shareholder-employee are deductible by the S corporation and reportable as wages on the shareholder-employee's Form W-2, subject to income tax withholding.

Share this post


Link to post
Share on other sites
13 hours ago, Larry Starr said:

Box 1 shows the taxable income.  Therefore, it won't include, for example, 401(k) deferrals or FSA contributions.

I know that Larry knows this, but for some folks out there who don't know the details, be careful on this. If there are ROTH deferrals, since they are after-tax, they already show up in Box 1. Too many times I have seen people who were taught to "add back in the deferrals" to Box 1, and consequently overstate the Plan compensation.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now