Understanding 2% shareholder
Understand the implications and tax responsibilities of being a 2% shareholder in corporations.
Overview
A 2% shareholder is a person who directly or indirectly owns more than 2% of outstanding stock of the corporation or stock possessing more than 2 percent of the total combined voting power of all of the stock of a corporation. A Single-Member LLC can also elect to be taxed as a 2% shareholder.
2% shareholders (including spouse, children or grandchildren) are not eligible to participate in cafeteria plans under IRC Section 125. Hence, benefits that they receive from the company are considered taxable, non-cash fringe benefits, and are subject to taxes federally and in most states. This includes:
- Health and accident insurance: 2% shareholder premiums are not subject to Social Security, Medicare or FUTA taxes, but are taxable for federal income tax and state income tax in most states. The premium amount is reflected on W2 Box 1, 14 and 16 (if state taxable).
- Company HSA contributions: these have the same taxability as health insurance for 2% shareholders, and the annual HSA individual and family limits still apply. It is reported on Box 14 of the employee’s W2.
- Group Term Life (GTL): the imputed cost of coverage is fully taxable for Social Security, Medicare, Federal income tax and State income tax in most states but exempt from FUTA. For 2% shareholders the entire imputed cost is taxable including the first $50,000, whereas for most employees, the first $50,000 is not taxable.
How are 2% shareholders setup in Check?
Employees of S corporations and single-member LLCs can be marked as a 2% shareholder in Check by setting either the 2_percent_shareholder_s_corporation or the 2_percent_shareholder_llc company-defined attribute.
Once an employee is declared as a 2% shareholder, they can no longer have contributions to any section 125 and HSA benefit types. Instead, they must report any of those benefits as earnings, using the following earning types:
Earning Types | Label |
2_percent_shareholder_benefits | 2% shareholder benefits |
2_percent_shareholder_hsa | 2% shareholder HSA |
group_term_life | Group term life |
Employees must be designated as 2% shareholders with an effective start of January 1st of any given year. If an employee has already received any section 125 or HSA contributions in the current year, and you need to switch them to a 2% shareholder, this will require a correction and involvement from Check Support. For instructions how to submit that request, refer to: link.
Last updated on March 31, 2023