2% Shareholders

Paying employees who are 2% shareholders of an S Corporation or a Single Member LLC.

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Important Terms

  • S Corporation – An S Corporation is a type of corporation that elects to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S Corporations report the flow-through of income and losses on their personal tax returns, and are taxed at their individual income tax rates. This allows S Corporations to avoid double taxation on corporate income. S Corporations are subject to certain limitations, including a restriction on the number of shareholders and who can be a shareholder.
  • Limited Liability Corporation (LLC) – A Limited Liability Company is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. This means that the company's profits go directly to its members without being taxed at the corporate level, and the members' personal assets are typically protected from the company's debts and liabilities. LLCs offer flexibility in management and fewer formalities compared to corporations.
  • Single Member LLC – A Limited Liability Company that has a single member.
  • 2% Shareholder – Someone who owns more than 2 percent of the outstanding stock of a S Corporation or a Single Member LLC. This includes spouses of 2% shareholders.

Designating Employees as 2% Shareholders

Employees who own 2% or more of an S Corporation or Single Member LLC (i.e. 2% shareholders) have special rules associated with them that govern the taxability of their contributions to medical and HSA benefits. While for normal employees, these benefit contributions are considered pre-tax, for 2% shareholders they are are taxable and must be reported as such on the W-2.

Employees can be designated as 2% shareholders in Check if and only if their parent Company has a business_type of either s_corporation or llc. If the parent Company has any other business_type, then none of its employees can be designated as a 2% shareholder.

In order to designate an employee of a S Corporation as a 2% shareholder, you can use the Company Defined Attributes API. You should first retrieve the available Company Defined Attributes by issuing a GET request like so:

curl -X GET \
  'https://sandbox.checkhq.com/employees/<EMPLOYEE_ID>/company_defined_attributes' \
  -H 'Content-Type: application/json' \
  -H 'Authorization: Bearer <API_KEY>'

If Check determines that the employee can be designated as a 2% shareholder, we will return a parameter in the response:

{
   "company_defined_attributes": [
       {
           "name": "2_percent_shareholder_s_corporation",
           "value": null,
           "type": "boolean",
           "label": "2% Shareholder of an S corporation",
           "description": "This employee owns more than 2 percent of the outstanding stock of the corporation or stock possessing more than 2 percent of the total combined voting power of all of the stock of the corporation. This includes spouses, children, and grandchildren of 2% shareholders.",
           "options": null,
           "effective_start": null,
           "default_value": false
       }
   ]
}

You may then submit a value for this parameter by making a POST request, like so:

curl -XPOST https://sandbox.checkhq.com/employees/<EMPLOYEE_ID>/company_defined_attributes -d '{
   "company_defined_attributes": [
       {"name": "2_percent_shareholder_s_corporation", "value": "true", "effective_start": "2024-01-01"}
   ]
}

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Validations

Note: We enforce two important validations around 2% shareholder designation, to ensure data is accurate at year end:

  • Employees can only be marked as 2% shareholders with an effective start date at the beginning of a calendar year.
  • Employees that have an active pre-tax health benefit associated with them cannot be marked as a 2% shareholder unless their pre-tax health benefits are either deleted or ended before their effective start date as a 2% shareholder.

Recording 2% Shareholder Benefit Contributions

Check has implemented support for reporting 2% shareholder benefit contributions via two earning types:

  • 2_percent_shareholder_benefits
  • 2_percent_shareholder_hsa

In order to record benefit contributions for a 2% shareholder, you should create a payroll item for the employee in question with earnings that have one of the types above. This will ensure that we correctly tax the employee for their benefit contributions.

Note that this can be done in one of several ways – either at year end or throughout the year, on each payroll.

  • At Year End: Many 2% shareholders pay the premiums for their benefits outside of payroll over the course of the year. At year end, they provide the payroll provider with the total cost of these benefits. These benefits can either be added to the last payroll of the year or added to a separate off-cycle payroll.
    • If added to last payroll of the year: The lump sum benefit contributions will increase federal income tax withheld (and state if applicable), significantly reducing net pay (possibly down to $0).
    • Separate payroll at year end: Since there are no actual wages being paid out to the employee on this payroll, the payroll will simply increase taxable income for federal income tax (and state if applicable) and no taxes will be reported or withheld.
  • On Payroll Cadence: Alternatively, 2% shareholder earnings can be added to each regular payroll throughout the year, similar to the way benefits are handled for other employees. Instead of treating these benefits as pre-tax, they will be treated as taxable wages.

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Validations

Note: We enforce important validations around 2% shareholder earning creation, to ensure data is accurate at year end:

  • When creating payrolls, 2% shareholder earnings cannot be created for employees that are not 2% shareholders.
  • When uploading historical payrolls, 2% shareholder earnings cannot be created for employees that are not 2% shareholders.