S Corporations are the second most popular form of conducting business in the U.S. Only sole proprietorships are more popular. It is understandable why S Corporations are popular—possibly protect one’s personal assets under a corporate veil, likely avoidance of double taxation that can occur with C Corporations, and the potential reduction of employment taxes through use of fringe benefits.
These all create great value for the S Corporation (and its “owners” [technically referred to as ‘2% or more shareholders’]), SO LONG AS THE RULES ARE FOLLOWED. It is easy to run afoul with the IRS regarding proper W2 reporting.
Here are the most common W-2 errors that should concern “owners” of S Corporations:
1) Reasonable Wage
Perhaps the common and potentially costly error made by S Corporations is the failure to pay a reasonable wage to “owners” for services provided to the business. This is a controversial topic
with voluminous court cases and research materials available as to what a reasonable wage is.
Answer this common sense question:
If you are an “owner” and perform services for an S Corporation, how much would you have to pay someone else to perform the same services? Pay yourself that amount!
2) Personal Use Of Company Vehicles
Another common area of W2 reporting errors is the failure of S corporation “owners” to report the personal use of business owned automobiles and trucks.
It is important to track personal use of a company-owned vehicle and report it as taxable income.
3) Health Insurance
Another error made by S Corporation “owners” is not including the value of company-paid health insurance correctly on the W2. The health insurance premiums are reported on Box 1 and Box 14.
However the premiums are not subject to Social Security, Medicare and other employment taxes.
It is not a requirement to withhold federal income tax even though the premiums are reported as income.
S Corporation “owners” can turn around and deduct the premiums as an adjustment on page one of his/her 1040. This should mean a zero tax effect to S Corporation “owners” for this reporting.
However, failure to report health insurance in this manner can result in the denial of the premium reduction on the personal tax return.
Confused yet? Do not be hard on yourself. W-2 reporting for ‘2% or more shareholders’ is a thorny issue. Contact a tax professional who understands these rules for help BEFORE filing your W2!
Kasperek & Co. Accountants have been assisting S Corporation “owners” with his/her W2 every January for almost 30 years.