Tag Archives: shareholder-employee

How to Issue 1099s and W-2s from Gusto Payroll (for 2023)

January 18, 2024 Nancy McClelland Leave a comment

As a CPA whose company works with loads of small businesses that need to process payroll, I’ve used quite a few payroll systems through the years… and Gusto has become our favorite. It’s not without its quirks and issues, but overall it does a great job for a great price, and — key for the work we do — it syncs nicely with QuickBooks Online, as well as their own Benefits company and with Guideline retirement.

(By the way, our referral link will get you a $100 prepaid Visa card if you sign up and run your first paid payroll before Jan 31st, 2024! Bonus! Happy New Year!)

It seems that for 2023, Gusto has slightly changed the details for how they handle distribution of 1099 and W-2 forms — and so that no one ends up without a copy of their important documents, I am sharing the step-by-step process that we went through for our own firm, in hopes that it helps you manage it in your own small business.

Spoiler alert: the process of DIY-ing (aka creating the packet of 1099 or W-2 PDFs, going to the Tax documents section and finding/ downloading these PDFs, printing them, and mailing them) was enough of a pain that for sure next year I will just click the option to pay $3 per form to have them mailed for me for anyone who hasn’t selected “electronic-only delivery”. But before then, I will contact all my employees and contractors and ask them to please change their preferences to be electronic-only delivery next year, since the thing I would be mailing them is literally a printout of the same PDF that they can download themselves from their Gusto account.

And now — here’s the process I went through, in real time, as I walked through the steps myself.

First off, as the company/ employer, I received an email from Gusto (though it incorrectly stated that these are client tasks, rather than firm tasks) stating that I need to distribute important payroll forms to recipients before the IRS deadline of January 31, 2024.

When I click on the “Let’s do it” button for 1099s, it takes me (after logging in) to the screen below, which notes “If you have us mail forms for you, you can choose to exclude anyone who’s consented to have them delivered electronically.” This is pretty important, as I encourage everyone to accept this delivery method, even if they also request a paper copy. I am curious to see if they make this option clear even if I select “I’d like to download and distribute them on my own,” and will give that approach a try.

After selecting the second option — “I’d like to download and distribute them on my own” (DIY), I get this screen:

And then this screen:

And good news! Even in the DIY version, you can select “Only contractors who haven’t requested electronic-only copies,” which is a real win for everyone. It would be nice if they made that clearer on the first page, and simply said, “you can choose to exclude anyone who’s consented to have them delivered electronically.”

I take that back! NOTE: After going through the whole process (you’ll see this below), I never did get a packet that was just for the electronic-only folks. I was only able to download a packet for ALL employees. I will have to pick out which ones selected paper delivery and only print and mail those. Or I can go into each employee and download the form individually. What a pain! I don’t want to reward Gusto for handling this poorly, but if I could go back again, I’d have chosen to have them mail the ones who set their preferences for paper forms, for $3 each.

I clicked on “Create packet”, and nothing happened. However, this box shows on the right-side, so I’m guessing that’s why:

(I think this could have been handled a bit better by the Gusto programmers.)

Now, if you had any contractors who did not select electronic delivery, you would in theory eventually get a copy of that packet, and use the PDFs of the 1099s that were made available to you by Gusto — you would print and mail them yourself. But in my experience with the W-2s (below), I was only ever able to download a copy of ALL the forms, not just the ones that set their preference to receive a paper copy. Or I could go to each employee and download them individually. Therefore, as I keep saying… if I had this to do over, I’d pay Gusto the $3 per form for just the ones that requested paper forms. And in future onboarding, I’d ask them to set it to “electronic-only”.

Next, we’re going to give the W-2 form distribution a try. I clicked “Home” to get to the main page of my Gusto account but got an error message, probably because as an accountant user, it got confused about whether to take me to my own firm homepage or my client dashboard. So I went back to the original email and started from there. As expected, it brought me here:

And after selecting DIY, it took me here:

After clicking “Continue” it took me to a page that nicely spelled everything out for me:

It turns out that four of my employees have requested paper copies. They may have also requested electronic copies, but since that doesn’t matter one way or the other here, it’s not indicated. (Note to self: ask your team members to select electronic-delivery-only!)

So this time when I clicked the “Create packet” button, I got a pop-up.

I clicked on the “Go to Tax documents” button and it took me to a very familiar screen (since I have to download this information on behalf of clients from time-to-time), with a tab for each type of tax document.

I clicked on W-2s and followed the prompt to download my 2023 W-2 packet — but this turned out to be the entire employer-copy of the W-2 packet. So, I clicked below that on the option to “Distribute 2023 W-2s” — but that just took me back to “Choose how to distribute W-2s” starting page.

To be fair, it did say in the pop-up that they’re creating my packet and would email me when it’s ready… I’ll go check email next.

But first I want to point out that this page also makes it clear in the employee list at the bottom what the delivery preference for each employee is, making it easy for me to make good on my “note to self” above and reach out to those who requested “paper and electronic”. (By the way, my own name is on that list. Sigh.)

It’s many minutes later and I still don’t have an email saying my packet is ready.

At this point, I’m wishing I’d just paid Gusto $3 each for them to mail these for me.

I’m going to sign off on this blog post for now and return to it once I get an email from Gusto. And if I don’t, I will shake my fist at them and ask my team members if I really have to spend $3 each to send them a paper W-2 when they already have a PDF.

Update: I never did get an email from Gusto saying my packet of just the ones that need paper copies was ready. And when I went back in to just pay Gusto the dang $3 each, I got this screen:

So apparently that’s not even an option anymore. Heads-up! (This is the part where I scroll back to the top of my post and give everyone a spoiler alert before starting this process.)

The key takeaway I’d like to share with clients and readers is that you should absolutely, unquestionably go into “Tax Documents” and look at the list of people under the W-2s and 1099s tab to see if anyone chose paper-only (I am presuming that’s an option but do not truly know… because it’s 2024 and who would choose that, anyway). If anyone did *not* consent to electronic delivery, then go spend that $3 per employee. For everyone else, reach out and ask if this is really necessary, and suggest they (myself included, whoops) change their settings — not because the $3 per form is a prohibitive cost, but because the amount of time and energy spent in making that happen (any at all) is simply not worth it in this day and age of electronic communication.

I will leave you with a hilarious poem that a dear colleague of mine shared with me recently.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

Education, IRS, Software, Tips

How To Add Health Insurance To S-Corp 2%+ Owner W-2 In Gusto

December 28, 2022 Nancy McClelland Leave a comment

As anyone who’s worked with me — clients, team members, colleagues, vendors — knows, I adore Gusto Payroll. They truly changed my life for the better (not to mention the lives of thousands of small business owners) when they decided to create a tech-forward payroll company that seamlessly syncs with QuickBooks Online.

(Note: our affiliate link will earn you a $100 gift card after you run your first payroll — or up to $500 if you are an accountant or bookkeeper who signs up your own clients. We may earn a commission as well — win-win! For our own clients, we offer a 15% discount in lieu of referral fees.)

I have explained the importance in prior blog posts of making sure that S-Corp medical premiums are properly tracked and reported in QuickBooks and on the W-2 forms for shareholder-employees. The IRS has driven this point home repeatedly, and even has a page devoted to som e issues that arise specific to owners of 2% or more of an S-Corp who perform services for the company.

With so many of our own clients using Gusto, I wanted to share how to properly report S-Corp medical insurance premiums, and decided to make the information available to the public as well.

Much of the following information was collected from the Gusto Help section — which is freely available to the public — but as their dynamic support site changes structure and organization frequently, it seemed like collecting the various instructions into one area would be helpful.

Setting up benefits for S-Corp 2% shareholder-employees

For S-Corps, the IRS requires that health insurance premiums paid by the company to employees with a 2% or greater ownership be reported as wages (not pre-tax benefits), and included on their W-2s in Box 1, but not Boxes 3 or 5.

(This means that the total will be taxable for income taxes but not payroll taxes, and once the self-employed health insurance deduction is taken on the personal return, the wages and deduction net to zero — so in effect the corporation will have taken the deduction for the health insurance. More in this blog post and from the IRS here.)

Note: If your company’s benefits are provided through Gusto, they will manage this reporting for S-Corp owners automatically, as long as they are marked as a 2% shareholder in Gusto (under “Employment Details” in the shareholder-employee’s info in the “People” section).

However, if you offer benefits outside of Gusto (and use Gusto for payroll), then follow these steps to set up benefits for 2% shareholder employees:

Sign in to your Gusto admin account.
Go to the People section and select Team members.
Click on the employee’s name.
Under Employment Details, make sure the employee is designated as a 2% Shareholder.
Under Benefits, click Add Benefit.
Next to Select a Benefit, select “Create New Benefit” from the drop down menu.
Enter a Benefit Name.
Next to Benefit Type, select Medical, Dental, or Vision.
You will have the option to enter a Company Contribution Per Pay Period or Employee Deduction Per Pay Period. (For S-Corp shareholder-employees, this will usually be a company contribution, but check how your plan is set up.)
Company contributions: Taxable at the employee level only, for both federal and state income tax.
Employee deductions: Fully taxable as wages at both the employee and employer level.
Click Save.

As long as the entity is set up in Gusto as an S-Corp and the shareholder-employees that own 2% or more of the company are marked as such under Employee Details, the health insurance premium benefit should be added to Box 1, but not Boxes 3 or 5. You should review your draft W-2 at or shortly after year-end to make sure it is accurate, and contact Gusto immediately if there are issues so they can correct them before the final W-2 is issued and filed with the IRS and SSA.

FAQs about 2% shareholders:

Q: Which benefits must be taxed as wages for 2%+ shareholders?

A: Medical, Dental, Vision, HSAs, and more must be taxed as wages. Refer to Publication 15-B to view all a full list of benefits that are treated as wages.

Q: What if a 2%+ shareholder status changes part way through the year?

A: Change the 2%+ shareholder status in the employee’s account. Employees who are 2%+ shareholders at any point during the year must be taxed as such for the entire year.

Q: What happens if you need to update an employee’s 2%+ shareholder status mid-or-end year, and they have already received pre-tax benefit deductions this calendar year?

A: If your company withheld health insurance premiums rather than having them processed as 2%+ shareholder — contact Gusto Support, as their team will need to assist within adjusting the benefits, since there are tax implications.

Education, IRS, Software, Tips

Partnership And S-Corp Medical Insurance Premiums For Owners: Avoid Double-Dipping

December 28, 2022 Nancy McClelland Leave a comment

Note: much of the information below was pulled from the old Polito Eppich website — however, they have since merged with another firm to become Magnus Blue, and as such have removed their former blog content. My 2018 blog post linking to their article on how to properly account for partnership and S-Corp health insurance to avoid double-dipping now points to a web archive of the original site — but since that’s hard to find, I’m borrowing some of their material and sharing it here as well. To-date it’s the most well-illustrated and to-the-point summary I’ve seen on the topic.

The IRS rules for reporting health insurance premiums for partnership and S-Corp owners are complex, and as a result, easy to accidentally bungle. Sometimes an entity will incorrectly deduct the premium, and so will the owner — on their personal return — leading to what is known as “double-dipping”. This usually happens when the person preparing the personal return did not also prepare the business entity return.

TL;DR? The most important take-aways are:
1) you can’t double-dip; and,
2) though the particular hoops that have to be jumped through are a) different for partnerships than for S-Corps, and b) a PITA for both, they are in fact the law and must be followed.

The key here is that when the entity pays for health insurance for owners, it is deducted as payments for services to the partners or S-Corp shareholders — who are then entitled to take the self-employed medical insurance deduction — which means it will net to zero deduction on the personal return. If you’re not careful, then the deduction is mistakenly taken on both the entity-level and personal returns. In their original article, Polito Eppich illustrated the accidental double-dipping (all charts are copyright of Polito Eppich).

We will use an example of a $10,000 medical insurance premium to illustrate this issue. Here’s what was happening (incorrect approach):

Income (Expense)	Passthrough Business Entity	Owner’s K-1	Owner’s Personal Return	Net Taxable Income
Medical premiums paid	$(10,000)
Ordinary income reduced		$(10,000)		$(10,000)
Self-employed medical insurance deducted			$(10,000)	(10,00)
Total effective deduction on owner’s return				$(20,000)

Accidental double-dipping — the $10k premium becomes $20k.

Here is how it should be handled:

PARTNERSHIPS

The actual deduction occurs at the partnership level and is passed to the partner — via lower income on the K-1.

If the partnership pays for the health insurance premiums for its partners, it deducts the expense as guaranteed payments and reports the amount to each partner on their respective K-1s as guaranteed payments.

The partner then picks up the guaranteed payment as income and reports “self-employed health insurance” deduction. The guaranteed payment offsets the self employed health insurance deduction for a net zero effect on taxable income, thus the single deduction described above on the K-1.

(When a partner pays his (her) own medical insurance premiums, the self-employed medical insurance deduction is allowed if there is self-employment income.)

Correct reporting for partnership:

Income (Expense)	Partnership	Owner’s K-1	Owner’s Personal Return	Net Taxable Income
Medical insurance premiums paid and deducted	$(10,000)	$(10,000)	$(10,000)	$(10,000)
Guaranteed payment to partner		10,000	10,000	10,000
Self-employed medical insurance deduction		(10,000)	(10,000)	(10,000)
Total effective deduction on owner’s return				$(10,000)

Partnership: by following the IRS rules, the $10k premium remains a $10k net deduction.

S-CORPORATIONS

S-Corps are a bit more complex because owners who work for the company are paid payroll via W-2 (rather than guaranteed payments to partners). Keep in mind that these rules only apply to shareholders who own more than 2% of the company. Owners below 2% are not eligible for the self-employed medical insurance deduction.

The S-corporation deducts the expense as compensation and includes the amount on the shareholder’s W-2 — in Box 1, but not in Boxes 3 or 5, which means they are not subject to Social Security or Medicare taxes (commonly known as “payroll taxes” or “employment taxes”). The amount should also be reported in box 14 of the W-2 — this is only for informational purposes, so that the personal tax preparer knows to take the deduction. Some payroll companies will track this reporting properly throughout the year, but others require a call at year-end to make sure this amount shows up properly in Box 1 and 14. (See my blog post on how to handle this for Gusto Payroll.)

The shareholder reports the compensation from their W-2, then deducts the health insurance amount noted in Box 14 on the W-2 as a “self-employed health insurance” deduction on the personal 1040. Because the amount is subject to income taxes, but not employment taxes, taking the self-employed health insurance deduction leads to a net-zero impact to taxable income. The actual deduction is achieved at the corporation level and passed to the shareholder in the form of lower income reported on the K-1.

Correct reporting by S Corporation for 2% or greater shareholders:

Income (Expense)	S-Corp	Shareholders’s K-1	Owner’s Personal Return	Net Taxable Income
Medical insurance premiums paid and deducted as owner wages lower ordinary income	$(10,000)	$(10,000)	$(10,000)	$(10,000)
Owner’s W-2			10,000	10,000
Greater than 2% shareholder medical insurance premium (Noted in Box 14 of W-2)		(10,000)	(10,000)	(10,000)
Net taxable income reported by shareholder				$(10,000)

S-Corp: by following the IRS rules, the $10k premium remains a $10k net deduction.

Either way — partnership or S-Corp, the net result is that the amount paid by the company for health insurance on behalf of owners should only be deducted once, on the entity return, and as payments for services. On the personal return these payments will net to zero after the deduction for self-employed health insurance is taken.

Cooperatives, Education, Tips

Transitioning To Employee Ownership: FREE On-Demand Webinar

May 13, 2022 Nancy McClelland Leave a comment

Yesterday I attended an excellent webinar on how two different small business owners transitioned ownership to their employees — one using an ESOP and one using a Worker Co-op structure.

As a CPA and consultant to many small business owners, I often am asked about succession planning and exit strategies, and my experience in cooperative taxation often leads me to recommend a transition to employee ownership. So I was glad for the opportunity to learn from the experiences of these folks who are in the thick of it.

My colleague Courtney Berner of the University of Wisconsin Center for Cooperatives led the webinar and Q&A, and Steve Storkan of the Employee Ownership Expansion Network interviewed business owners Gina Schaefer and Marty Ruddy.
– Courtney – https://uwcc.wisc.edu/staff/berner-courtney/
– Steve – https://eoxnetwork.org/
– Gina – https://acehardwaredc.com/pages/employee-owned — gina@acehardwaredc.com
– Marty – https://www.terrafirmamn.com/

I strongly recommend the informative and helpful free recording!

And just in case they might be helpful as an outline or while following along with the recording, the notes I took during the session are below.

Thanks again to Courtney, Steve, the panelists, and UWCC for this excellent resource!

Three main EE ownership structures —

ESOPs, most common, about 70% – better for larger busineses
Worker co-ops, less common but fast-growing
EE Ownership Trust, more common in Britain

Half of privately-held businesses are owned by boomers — who will be retiring soon (the “silver tsunami”).

ESOP – Employee Stock Ownership Plan
Employee financial control, not management control.
How does it work? the company gets a loan (from bank or owners) to pay the owners (whatever percentage ownership is agreed upon; can happen in tranches)
The owners get paid, and the company pays the loan off over time on behalf of the staff, and releases the stock to the employees
Employees just “get” their shares as opposed to worker co-ops where each member has to buy in.
Owner can remain CEO as long as necessary.
The tax benefits of an ESOP can save about 20% of value in terms of the company price compared to selling to private equity.
Vests in 20% increments annually until the employee is fully-vested.
If someone departs, the company has five years to pay them off.

Worker Cooperative
Employee-Owners have both financial and managerial control. One member, one vote.
Must sell 100% ownership to the workers; no partial purchases like with an ESOP.
Owner may become one of the many worker-owners in the new structure.
Owner or bank can finance a loan to pay the owners off over 15 years or however long.
John Abrams model – buy-in for each new owner is the price of a decent used car. :)
So they are two different things: buy-in by each worker-owner, vs company-held loan to pay off the owner.
Company can lend each owner some of the money to buy their share if that helps.
What happens if someone leaves from Marty’s worker co-op: the company has five years to pay back $9k initial investment if necessary,
but usually pay it off very quickly just to get it off the Balance Sheet if they have the cash to do it.
Then the internal capital account gets paid out in a different way, on a schedule with other owners.

Inviting staff to have an ownership mentality and be a democratically-run organization is very valuable, especially in anticipation of transitioning to ownership — but different from actual EE ownership.

Recommended book: John Abrams, “The Company We Keep”.

Neat idea – buying a pie for new owners as a way to say “here’s your piece of the pie”.

National Cooperative Resource Map – links to co-op development centers, associations, cooperative-friendly capital, co-op statutes by state:
https://uw-mad.maps.arcgis.com/apps/MapSeries/index.html?appid=a5eda85604f84f02a4f24b3b4483fb69

Questions from Q&A:
Are you using the terms “Exit Planning” and “Succession Planning” interchangeably, or do they have different meanings for you?
How did you educate your employees on employee ownership?
I am working with two businesses doing projects with students in my co-op business management course. An existing worker co-op has lots of legal questions how they can and/or must differentially treat workers as employees and workers as owners. Can you advise a good first landing on legal assistance to help get their questions answered or directed to those who should. I’m no lawyer and most that I work with are in the farmer co-op world. Thanks.
What is your advice for business-owners where the owner is the key employee with specialized knowledge and credentials that is not easily replaced by other existing staff?
In Marty’s buy in model, can that buy in level be paid to the co-op over time (installments) or is it all upfront (day 1).
What happens to the equity in the business as an employee leaves, and how is that different between the 2 structures
Could a consumer cooperative spin off, say, 30% for employees to become owners under either of these structures?
What is the difference in governance control of workers as an ESOP vs a Worker Co-op? I expect there is a range of options.
A follow up to the question about spinning off 30% of a consumer co-op, could the creation of the ESOP or worker co-op component be a vehicle for capitalizing the co-op for expansion or other purposes?
Are worker equity shares in a worker co-op appreciable over time?
Steve, you mentioned existing ESOPs or Coops bringing in another small biz as a merger/acquisition, perhaps sold by a founder with no buyer prospects. Can you talk more about this as another pathway for transitioning an existing biz to an employee-owned company?
I appreciate the conversation about sharing the wealth, but one challenge I see as a CPA is that workers are always convinced that owners are “hoarding” the profits and that’s one of the motivations for becoming worker-owned. However, the company has to be healthy and profitable for this to happen! It’s not magic. If the company is struggling, the worker-owned version of the company will struggle, too. It’s not a magic bullet.
I know there are food co-ops that are also worker co-ops. How could a consumer co-op facilitate their workers starting their own worker co-op inside the food co-op?
Are there incentives, support, programs, etc. for someone looking to start a private business with a roadmap from the beginning to convert to an employee ownership model?
If a small worker owned cooperative or ESOP is often structured as a partnership for tax purposes, does the cooperative structure only impact management?
For Marty, how do the workers owner manage or address the tension between investment in the equipment needed for the business versus profits place into the internal capital account and subsequently distributed?
Interested in any ideas or models for how workers in a consumer co-op might gain “more stake in the game,” feel a real sense of ownership and directly benefit from the growth and success of the business.
What are unique challenges associated with performance management (horizon problem, shirking, freeriding, etc) at employee owned businesses? Do you use any tools/tech for reviews, ratings, etc?
Can you highlight top 3 challenges of running an employee owned business that technology or tools can help solve?
Is there any way to plan succession or manifest employee ownership when the company is merely a one or two person shop without younger family?

Education, IRS, Tips

Reasonable Compensation Stress Test & Resources

March 5, 2022 Nancy McClelland Leave a comment

This isn’t the first time I’ve posted about the useful resources offered by RCReports — but as it turns out, it’s been a while. Apparently I take it for granted that everyone knows about Reasonable Compensation requirements all too often, and then I regularly discover that it’s just not true.

Note: I am a loyal paid subscriber to RCReports, and receive no compensation or discounts for promoting their service or resources. I just think they’re great.

In any case, recently I was asked by a colleague to train her on the basics of Reasonable Compensation and walk through my process. I asked her to do these three pieces of homework first:

Read this article about stress-testing the RC amount – How to Stress Test a Reasonable Compensation Figure – RCReports
Watch this 2-hour RC Reports training session – Reasonable Compensation for S Corps on Vimeo
(tip for professionals – this class is sometimes offered on CPAacademy for free, with CPE credit included).
Watch this 1-hour RC Reports demo – RCReports Product Demo – RCReports

I know most non-accountants won’t bother with the 2-hour training session that walks through court cases and the history of Reasonable Compensation audits and challenges. And certainly folks who are not in the business of performing these calculations aren’t likely to bother with the 1-hour demo.

But anyone running their own corporation, and those considering electing S-corp status, will want to read about stress-testing. This is something you can do regardless of the calculation process, or how you got to the salary amount in the first place. A helpful excerpt (edited) from the article:

There are six main factors or tests (the IRS lists even more), but “applying just the first three will usually tell you whether a compensation is reasonable or not. In other words – three strikes and you’re out.”

1) Training and experience: Does $X/year seem like enough compensation for somebody who has this level of training and experience?
2) Duties and responsibilities: Does $X/year seem like enough compensation for someone with these duties and responsibilities?
3) Time and effort devoted to the business: Does $X/year seem like enough compensation for someone who worked this many hours/week?

But what if the company can’t afford to pay reasonable compensation? I hear that question a lot, as you might imagine. That’s a common situation, and a simple answer — you’re not required to pay yourself the entire amount of salary… it just means that you can’t issue distributions until it has been paid. “The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.” And no fair holding off on paying salary for years while building up retained earnings and then issuing a huge distribution in the first year you pay yourself salary. The IRS knows that trick as well. RCReports writes more about the issue in this article — check out Example 4 in particular for information about the look-back period.

There are different methods of determining Reasonable Compensation — yes, I’m referencing yet additional RCReports articles for details — the cost approach, market approach, and income approach. The Cost Approach generally works best for small businesses where the business owner provides multiple services for the business (wears many hats).

The key with all of these resources is to get shareholder-employees to take a closer look at their own salaries and make sure they are following IRS guidelines. Stress-testing is a great place to start, but for a more thorough approach to calculating Reasonable Compensation, I recommend contacting a CPA with background in this area who can walk you through an RC interview and help you support the amount you ultimately choose.

The Dancing Accountant