How to Handle S-Corp Owner Benefits in Homebase

S-Corporation owners' benefits must be handled carefully in Homebase Payroll to ensure proper tax reporting and compliance.

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Understanding s-corp owner (2% owner) benefits

In an S-Corporation, a 2% owner is an individual who directly or indirectly owns at least 2% of the corporation's stock. This 2% owner status has specific implications for the owner's pre-tax benefits eligibility, particularly in the context of health insurance premiums.

For a 2% owner of an S-Corporation, health insurance premiums paid by the corporation on behalf of the owner may be treated differently for tax purposes. Unlike employees who receive tax-free health insurance benefits, a 2% owner is generally required to include the value of these health insurance premiums in their gross income. This means that the premium amounts are subject to federal income tax withholding but not to Social Security and Medicare taxes.

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S-corp benefits in Homebase Payroll

Employees logged as s-corp owners are NOT eligible for any pre-tax benefits recorded on their profile in Homebase. You can now record company-paid 2% shareholder health premiums and HSA contributions directly on a payroll run.

S-corp owner status should be indicated on the employee profile on the Job Details page under Payroll Settings:

If this field is not completed, the employee can still be included in payroll. However, to keep your payroll records accurate, it's recommended to indicate the s-corp shareholder status for any owners as "yes."

Owner benefits and Owner HSA can only be added for employees marked as s-corp owners.

How to add s-corp owner benefits to a payroll run

1. Open the payroll run and go to Hours and time off.
2. Select Column settings, then Show/hide columns.
3. Turn on Owner benefits and Owner HSA. The hint under each reads “Available for S-corp owners.”
4. Enter the company-paid health premium in Owner benefits and the company HSA contribution in Owner HSA for each owner.

What to expect on the run

• These amounts are not extra cash on the paycheck.
• On the run summary, they appear under Payments already received, labeled S-corp benefits and S-corp HSA.
• They count toward gross wages and are reported on the W-2 as taxable fringe. Taxes are not withheld on these amounts.
• Pre-tax health enrollment does not change. An s-corp owner still cannot be enrolled in pre-tax health benefits. Enter the company-paid premium as Owner benefits instead.

Recording only s-corp benefits on an off-cycle or manual payroll
If you are running an off-cycle or manual payroll just to record s-corp owner benefits, you may need to delete the owner’s salary from that run so that only the s-corp amounts are recorded.

If your payroll run is rejected
If an owner is not set up as a 2% shareholder, the run will be rejected with this message: “{Name} isn’t set up as a 2% shareholder, so they can’t receive S-corp earnings. Remove their S-corp earnings or update their shareholder status.”

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Properly recorded s-corp owner benefits

Once entered manually by Homebase's Payroll Support team, s-corp owner benefit amounts are recorded on the employee's W-2 in Box 1, Box 14, and Box 16.

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S-Corp Owner Health Benefit Mismatches

Throughout the year on payroll, no pre-tax benefits are logged for the owner. If pre-tax benefits are recorded in error, this results in a s-corp owner health benefit mismatch. 

What is a s-corp owner health benefit mismatch? 

A s-corp owner health benefit mismatch may occur when an employee is set as an s-corp owner: Yes on their profile in Homebase, but previously had pre-tax company benefits logged on payroll. These two events should not exist within the same tax year as a s-corp owner is not eligible for pre-tax company benefits. 

If an s-corp owner health benefit mismatch occurs, the Homebase Payroll Support team must perform a correction to remove the previously applied pre-tax benefits. 

How to fix a s-corp owner health benefit mismatch?

Review your employees' settings for accuracy. If your employee was set as an s-corp owner in error, follow the steps below to update their status & avoid a future mismatch. 

1. Navigate to your employee's profile in the Team tab
2. On the Job Details page of their profile, scroll down to the Payroll Settings section
3. Click Edit
4. Update the field indicating s-corporation owner status to: No
5. Click Save
6. You're good to go!

Payroll Correction for Pre-Tax Benefit Errors

If your employee is accurately logged an s-corp shareholder and the pre-tax benefits were recorded in error, Homebase will need to complete a payroll correction. This correction will include the following:

1. Void of all pre-tax benefits deductions and contributions on payroll for the calendar year
2. Entry of the total annual company contribution ($) towards shareholder benefits in a manual entry 

To facilitate this correction - notify Homebase Payroll Support of the following information: 

• Confirm that the employee(s) should be logged as a s-corp owner
• Provide the total annual company contribution ($) towards shareholder benefits for each owner