Nancy modeling at the Beehive In Bloom Fashion Show | photo by Zak Jacobson
It’s not often I am described as either brilliant or insightful — so it’s a banner day when referred to as both.
And what better day than today, the 22nd anniversary of starting my own accounting firm?
To celebrate, I am delighted to share a recent interview with CanvasRebel, an online magazine and podcast that highlights voices of small business owners — in their words, “stories about our business or career that we might share at dinner or over coffee, but that wouldn’t necessarily make it into our memoir at the end of our lives; stories that illustrate the nitty-gritty details of what it takes to be successful day to day, how to build and grow a client base, recruit, train and manage a team or generate a living.”
I agree wholeheartedly with the folks who interviewed me. “There is so much we can learn from each other, and we hope these stories inspire you to pursue your passion and support those who are doing so themselves.”
Their questions were thought-provoking and caused me to truly reflect and think about some of the universal truths that I’ve learned in working with small business owners as their CPA. Questions such as:
What’s the best advice you’ve ever given to a client?
How did you get to where you are today?
What do you think helped you build your reputation within your market?
Do you have any insights you can share related to maintaining high team morale?
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.
Chicago Office Of Labor Standards Minimum Wage Chart
The City of Chicago and Cook County both saw increases to their minimum wage requirements as of July 1, 2023 (they have fiscal years that end June 30, which is why we see their updates at this time each year, rather than January 1, which is when the State of Illinois changes usually go into effect). Since reaching $15 per hour in 2021, the minimum wage for Chicago increases annually per ordinance according to the Consumer Price Index, or 2.5%, whichever is lower.
In Chicago, minimum wage will increase to $15.80/hr for “large” employers (21 or more employees) and domestic workers. The minimum will be $15/hr for “small” employers (4-20 employees). For tipped workers, who tend to earn a large portion of their pay from gratuities, the minimum wage is going up to $9.48/hr for large employers, and $9/hr for small. (Efforts to eliminate this practice are yet again gaining momentum under the new mayor.) As has always been the case, if tips do not bring the worker up to the non-tipped employee minimums, the employer must make up the difference. Most payroll software (including Gusto) will address this discrepancy automatically, but it’s worth checking your system to make sure.
The overtime minimum wage for non-tipped employees is calculated at 1.5 times the minimum wage. The overtime wage for tipped Employees is calculated at 1.5 times the tipped minimum wage, minus no more than the current maximum tip allowance. The maximum tip allowance is calculated by subtracting the tipped minimum wage from the regular minimum wage. Therefore, in Chicago, overtime minimum wages will increase to $23.70 and $22.50, respectively.
Rates for “youth” workers in Chicago — those under age 18, in a subsidized temporary youth employment program, or transitional employment program — are now $13.50/hr for regular pay, $20.25 for overtime, and $8.10 for tipped workers.
In addition, the minimum wage to be paid under City of Chicago contracts or concessionaire agreements is increasing from $16.00 to $16.80 per hour for non-tipped employees and from $8.20 to $8.80 per hour for tipped employees.
Chicago’s Minimum Wage and Paid Sick Leave Ordinance guarantees a minimum wage for employees working more than 2 hours in any 2-week period in Chicago for an employer with four or more workers. Domestic workers are guaranteed Chicago’s “large” employer minimum wage irrespective of the number of workers.
Employers must provide the Minimum Wage and Paid Sick Leave notice to all covered employees with their first paycheck, as well as in communal areas at a workplace. Notices must be provided in English and any language spoken by employees that do not speak English proficiently, if a notice in that language has been provided by the Department of Business Affairs and Consumer Protection on the Office of Labor Standards website. Notices can be provided electronically.
Parts of Cook County that are not in Chicago, and for which the municipality did not “opt out”, allow lower rates than Chicago ($13.70/hr regular pay and $8/hr for tipped workers), but require higher hourly pay than the State of Illinois ($13/hr regular pay and $7.80 tipped workers).
The federal minimum wage, which was last raised in 2009, stands at $7.25 an hour, which when adjusted for inflation is the lowest in 66 years.
Reactions to increased minimum wages by small business owners are understandably mixed. On the one hand, higher wages often help the local economy and boost consumer spending power. On the other, many small businesses owners operate on slim margins and make far less per hour than their employees. An increase in the minimum wage often means that some staff hours are reduced or eliminated in order to stay in the black.
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.
Chase Bank seems to be having issues today… many small business owners have reported seeing duplicate Zelle notices, but it turns out: those aren’t just duplicate notices. Chase is actually taking the money out twice!
From Chase —- We’re sorry that some customers are seeing duplicate transactions and fees on their checking account. We’re working to automatically reverse any duplicates and adjust any related fees. 6/2/2023 11:59:40 AM ET
Chase banner notice as of June 2, 2023
Our professional advice to clients? Let’s just all take a deep breath and hope Chase fixes everything by Monday. Meanwhile and most importantly — make sure anyone who gets a duplicate payment knows that the second one will be reversed soon, and conversely, that any duplicate payments you receive are likely to be pulled back out momentarily.
This will also complicate small business owners’ QuickBooks bank feed this month, with a lot of duplicate transactions, duplicate reversals, fees and fee reversals… let’s wait until the dust settles and then decide how to handle them all. Generally, if you go ahead and accept them to the place where they would normally be categorized, then make sure to accept the reversal to the same category.
Please spread the word to other Chase users.
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.
Everyone who reads my blog or works with me knows I’m a vocal proponent of the cooperative structure as a sustainable and enriching alternative to classic shareholder business models. Co-ops allow companies to distribute wealth among those that do business with it, rather than to investors just trying to make a buck. They exist to fulfill member needs, rather than to generate profit — though they can be lucrative to those involved. They also often have “collateral goals” that are in concert with the main mission, which often are focused on community engagement, social equity, and environmental issues.
However, there simply aren’t enough accountants out there who know about this model, or how to navigate some of the special treatment under Internal Revenue Code. That’s why the work that the National Society of Accountants for Cooperatives is essential. They provide the education and outreach to help accountants excel in this often-misunderstood realm of society.
To that end, I want to encourage folks who might be interested in breaking into this area to attend the upcoming “Fundamentals of Cooperative Taxation” webinar coming up next Wednesday, April 19th. What better way to relax after Tax Day than by watching a webinar on an unfamiliar area of taxation, right?
I happen to know one of the presenters, Teree Castanias, personally, and let me say, she is a powerhouse of knowledge! You don’t want to miss this class. As a bonus, the webinar is FREE to NSAC members (and only $59 for non-members). Use this as an opportunity to join today and get an amazing slate of webinars delivered to the comfort of your home every month.
Date: Wednesday, April 19, 2023 Time: 01:00 PM ET / 12:00 PM CT / 11:00 AM MT / 10:00 AM PT Presenters: Teree Castanias, CPA, Principal, Teresa Castanias, CPA, Brett Huston, CPA, Tax Managing Director, Associate National Director of Cooperative Tax Services, KPMG – retired Moderator: Wayne Sine, CPA, MBA, Director of Education, National Society of Accountants for Cooperatives Objective: 1. To operate on a cooperative basis for tax purposes, a company must meet specific tax rules in Subchapter T of the Internal Revenue Code. Attendees will understand the basic rules that must be met under Subchapter T. 2. Attendees will learn the definition of a patronage dividend and how it can be computed and distributed to members/patrons. 3. Attendees will also learn about the taxation of the member/patron, and the Form 1120-C that is used by Subchapter T cooperatives for filing its tax return. Field of Study: Taxes Program Level: Basic CPE Credit: 1.5 Credit Hours Delivery Method: Group Internet-based Prerequisite(s): No advanced preparation or prerequisites are required for this course.
Course Description
Teree Castanias and Brett Huston, both CPAs, will present the basic rules of Subchapter T of the Internal Revenue Code and describe how those rules affect a cooperative’s tax return, Form 1120-C.
This session will be helpful for anyone who wants to know what tax rules are required for a cooperative.
Teree is a CPA and has been working with cooperatives for over 40 years. She retired from KPMG in September 2009 after 32 years where she was a Tax Partner and the firm’s National Director for Cooperatives. She has worked with many types of cooperatives over the years, including large and small agricultural marketing and supply cooperatives, wholesale grocery, specialty supply, rural electric, Farm Credit agricultural lending, consumer grocery, and worker cooperatives of various types. She has assisted cooperatives from inception throughout their corporate life. Teree has been active in legislative issues affecting cooperatives, including Section 199 in 2005 and its predecessor provision, Section 199A, in 2017. Teree is active in several cooperative organizations – National Council of Farmer Cooperatives, National Society of Accountants for Cooperatives, and recently Cooperative Professional Guild. She has been in leadership positions in NCFC and NSAC and is a frequent speaker at webinars and conferences of all of these organizations.
Teree continues to provide cooperative consulting and litigation support services to all types of cooperatives in her own firm from October 2009 to present.
Teree recently retired from the Farm Credit West board of directors upon its merger with Northwest Farm Credit Services which became AgWest Farm Credit. She also served on the board of directors of California Center for Cooperative Development in Davis, California for over 15 years. Currently she is serving as a board advisor to Wine Service Cooperative in Napa, California, and as a Finance Committee member for Davis Food Cooperative in Davis, California.
Presenter: Brett Huston, CPA, Tax Managing Director, Associate National Director of Cooperative Tax Services, KPMG – retired
Brett is a CPA located in Auburn California. He has been working with cooperatives for over 32 years. He will be retired from KPMG in February 2023 and will continue to work with cooperatives in retirement. Brett was a Tax Managing Director with KPMG and the Associate National Director of cooperative tax services for KPMG working out of the Sacramento office. He has worked with agriculture marketing, supply, rural electric, consumer and Farm credit cooperatives. He has experience in providing tax compliance and consulting services to cooperatives including consultation regarding Section 199A, patronage and nonpatronage allocations, cooperative bylaw review, and state and local cooperative issues. He is currently a tax member of the National Council of Farmer Cooperatives and the National Society of Accountants for Cooperatives.
Moderator: Wayne Sine, CPA, MBA, Director of Education, National Society of Accountants for Cooperatives
Wayne Sine is an experienced and highly knowledgeable professional in the field of Tax. Wayne recently retired as Tax Director from his company, Southern States Cooperative. He has extensive experience working with agricultural cooperatives and has been a long-time member of the NSAC. He is extremely active in the NSAC, serving as both past Chapter President of the Atlantic Chapter, and past Chair of the Tax Committee, and is currently serving as the NSAC Director of Education. Wayne’s career is marked by several accomplishments, and he has always been involved in many organizations, spreading his knowledge. Wayne is a member of the Legal, Tax, and Accounting (LTA) Committee for the National Council of Farmer Cooperatives. He is also Past Chair of both the Tax Committee of the Virginia Chamber of Commerce and the Virginia Manufacturers Association. Wayne also served on the Tax Policy Committee at the Virginia Society of CPAs and served as past Region Vice President for the Tax Executives Institute.
Cost Free for NSAC Members / $56.00 for Non-Members
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.
There were three SBA reporting dates: December 31, 2021; December 31, 2022; and a final report date of April 30, 2023 — which is fast approaching. The RRF eligible expense period, however, allows costs from the very beginning of the pandemic, February 15, 2020, clear through to March 11, 2023. The two year-end reporting dates were intended as just a progress report of what the recipients had spent so far in eligible costs.
The great news for most businesses was that if all the RRF funds were allocated to eligible costs before the first reporting date, no additional reporting was required. If not, then the business needed to come back the following year and report a second time. At this point, most restaurants have (hopefully) already submitted their final report.
However, for those who missed the first two reporting dates; or somehow didn’t expend all the funds before the end of 2022; or simply did not understand how to report properly; or didn’t realize what a wide date range of eligible expenses they could use… there is one shot left at a final report to the SBA, or they risk having to pay back the funds.
This blog post (with a 20-min video walking you through the process) is our suggestion of how to translate the info you already have in your bookkeeping software into a format that will easily conform to the Restaurant Revitalization Award Portal requirements.
Sample email from SBA regarding the initial RRF year-end reporting
Spoiler alert: the process takes more than 5 minutes. It can easily take an hour or more. The actual entering of data into the SBA RRF portal is the part that only takes 5 or so minutes.
Our recommendation is to download the free Restaurant Revitalization Fund Tracker from the American Institute of CPAs (AICPA) website (as with their PPP Forgiveness Calculator, you do have to register for an account, but there’s no charge). However, instead of entering each individual transaction on the form (as it’s designed for you to do), our suggested shortcut is to take the information you already have in your bookkeeping file and enter each category as one line — then subtract all the non-RRF grants and assistance received, so that you’re not double-dipping.
As mentioned earlier, the RRF period runs from February 15, 2020 — the very beginning of the pandemic — to March 11, 2023. So we suggest you run a Profit & Loss for your company for the period of February 15, 2020 all the way through March 11, 2023 (or February 28, 2023 if you’re doing this before March 2023 is reconciled), and use those numbers to report what has been spent so far. Then enter the non-RRF grant funds as negative numbers on the same Expense Tracker tab, so that they net against each other. The result will be the data you submit to the SBA at restaurants.sba.gov once you log in to your portal.
Step 1 – download the AICPA RRF Tracking Tool Step 2 – enter the name of your company in the Summary tab, cell A9 Step 3 – enter the RRF amount in the Expense Tracker tab, cell C6 Step 4 – run your Profit & Loss from 2/15/2020-2/28/2023 (or 3/11/23 if you’re doing this in April 2023) Step 5 – export to Excel and save to your RRF file folder Step 6 – on the Expense Tracker tab, enter summary amounts from the Profit & Loss for Payroll, Rent, Utilities, Food & Beverage, Maintenance, Supplies, Covered Supplier Costs, and Business Operations Expenses
Tip: skip Mortgage Payments, Debt Service, Outdoor Seating Construction, and Depreciation, or ask your accountant for help with these, as they are usually on the Balance Sheet or in the Non-Operating Expense section of the Profit & Loss, and are therefore harder to DIY.
Tip: Business Operations Expenses are all operating expenses that are not already accounted for in one of the other categories.
Step 7 – IMPORTANT: enter all the non-RRF grants and financial assistance as negative amounts on the Expense Tracker tab — this is to prevent any double-dipping Step 8 – go to restaurants.sba.gov and log in Step 9 – enter your name, address, EIN, phone, and email (if this information is not already there) Step 10 – enter the amounts from the Summary tab — Note: you cannot enter more than the total RRF grant, so you may need to reduce one or more of the categories so that you don’t exceed the total. Step 11 – if you have allocated all the RRF funds, certify as such — you will not be required to repeat this progress report next year; if you have not allocated all the RRF funds, you will be able to “Save” but not “Submit”.
You have until March 11, 2023 to allocate all the funds (aka spend them on eligible expenses), and until April 30, 2023 for final reporting. If it turns out you didn’t have enough eligible expenses from 2/15/20-3/11/23 using Profit & Loss Operating Expenses, then take some time to work with your accountant to determine if you have debt service, mortgage payments, capital expenses for outdoor seating, or depreciation that counts toward allowable costs.
In all cases: make sure to subtract all other grant income from expenses so you are not double-dipping!
23-minute video walking you through the whole process in Dec 2021
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.
As you might imagine, we get quite a few inquiries for tax preparation services, but a) we only do taxes for our small business accounting & bookkeeping clients, and b) we only work with clients in Illinois, Indiana and Wisconsin. I’m currently in the process of interviewing qualified CPAs and bookkeepers to develop a vetted list of firms to whom I can refer potential clients, but in the meantime, I do have a solution for finding a good local tax preparer — the National Association of Tax Professionals’ Find a Tax Preparer (natptax.com) searchable directory.
NATP is one of my favorite professional organizations, and their “Find A Tax Pro” tool works great! When you use the link above, it will automatically filter for folks who are NATP members — which means these people are voluntarily taking the extra step to obtain excellent education in the field on a monthly basis (via e-newsletters, webinars, conferences, their research service, quizzes, and the regular TaxPro magazine), as tax guidance changes so frequently.
(No, I don’t earn commissions for this — I just have great respect for them, have been a member most of my career, have taken countless courses with their instructors, and have been generally impressed with their research service. I also really appreciate what a solid ratio they have of female officers, managers and instructors, which is not always the case in my field. They still need to work on DEI, but let’s be real: so does everyone in accounting and tax, to be honest. It’s an arena rife with underrepresentation issues.)
My suggestion is to use the search box on the right (after you click the button on the bottom of the landing page) and enter the following:
1) What do you need? Tax Preparer
2) Specializing in? All
3) Located in? Type in your city and see if it comes up — if not, pick a slightly larger city nearby, or even your entire state if you prefer.
The thing is, taxes don’t have to be done by a local preparer (so many of us are remote at this point) — however, you do want to work with someone who understands the specific requirements of your geographic area.
So even though it might be a remote relationship, it’s still best to go with someone from your area if you can. They might know something about your industry’s requirements in that area that a non-local would not.
Then lastly, scan or do an on-screen search of whatever list comes up based on your filters, and look for people who have the letters “CPA” or “EA” after their names. These are practitioners who went the extra mile (or twenty) to get a professional designation — it doesn’t mean they know everything, but they’re clearly committed to learning everything they can about tax law, so you want one of them!
And if you find a fabulous CPA in the Chicago area who is still taking on new clients, please let me know in the comments! (Bonus points for women-owned firms; extra bonus points for CPAs that offer tax, accounting, bookkeeping and advisory services.)
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.
Chicago businesses should take a moment to review upcoming changes before year-end.
The Chicago Department of Business Affairs & Consumer Protection (BACP) was designed to “license businesses and public vehicles, provide business education and access to resources, enforce the Municipal Code, and protect consumers from fraud,” which means that sometimes they have to create and enforce ordinances and regulations that are a bit arduous or challenging for small businesses. But in the public interest, we need to take a moment to review the annual changes and requirements to make sure we have everything in order. (Besides, the penalties for willful ignorance are no fun.)
With that in mind, here are some things you’ll need to make sure to take care of before ringing in the new year.
Illinois Department of Human Rights Sexual Harassment Training For the record, this one is state-mandated, not just city-wide. The Illinois Workplace Transparency Act requires all employers to comply with the sexual harassment prevention training by December 31, 2020, and thereafter must provide annual training to all employees. As of July 1, 2020, the Illinois Human Rights Act defines “employers” as those having one or more employees (replacing the prior threshold of 15 or more employees in Illinois for most types of discrimination). This means that every employer in Illinois must comply with this sexual harassment training requirement, for all employees working in Illinois, regardless of their status as part-time, intern, or temporary. There is no requirement to train independent contractors, though it is recommended.
Chicago Minimum Wage Back in 2014, the city implemented a gradual increase of the minimum wage. It applies to any employee who works at least two hours in any two-week period. As of July 1, 2022 the minimum wage in Chicago is $14.50 per hour for employers with 4 to 20 workers, and $15.40 per hour for employers with 21 or more workers. Tipped workers have a minimum wage of $8.70 for employers with 4 to 20 workers, and $9.24 for employers with 21 or more workers. If a tipped worker’s wages plus tips do not equal at least the full minimum wage, the employer must make up the difference. BACP offers a one-hour-long free webinar on the ordinance.
Chicago Paid Sick Leave This ordinance went into effect on July 1, 2017, and was so poorly-written that folks are still confused. It applies to any business or individual that employs at least one “employee” and has a facility within Chicago’s city limits (though Cook County followed suit a few months later and has a similar requirement). The term “employee” covers anyone who works at least 80 hours within a 120-day period (20 hours a month). – For hourly employees, paid sick leave accrues at one-hour for every 40 hours worked. Salaried-exempt employees are presumed to have worked 40 hours/week. – Employees are capped at accruing a total of 40 hours of sick leave each year, unless the employer opts to set a higher limit. – Employers must permit employees to carry over half of their accrued leave, to a maximum of 20 hours of unused sick leave each year (40 for employers with 50 or more employees). – Employers are not required to pay out any accrued but unused sick leave upon employment termination.
Illinois Secure Choice Retirement Savings Plan State law now requires every Illinois employer with 16 or more employees to either offer their own retirement program, or to sign up to help staff contribute to personal IRAs via Secure Choice. As of November 1, 2023, this obligation will extend to employers with 5 or more employees.
Aside from the administrative burden, there are no costs to small businesses owners. The program facilitates saving for retirement — but is still limited to the IRS’s annual $6000 cap ($1k higher for those 50 and up), increasing to $6,500 in 2023. (For those interested in a higher limit, I strongly recommend Guideline 401k plans for small businesses, which use low-cost Vanguard Admiral Shares — my own clients have the first five months of plan fees waived.)
(I’ll be providing a breakdown and analysis of the plan and the info-session in an upcoming blog post. Spoiler alert: I’m mostly pretty happy with this legislation! –This doesn’t happen often.– However, most sole proprietors will want to make sure to implement their own savings plan simultaneously, since they won’t be eligible to participate; and many others will prefer the 401k approach due to higher limits.)
State Unemployment Insurance Contribution Determination Rate If you have employees, you should normally have received a letter from IDES with your 2023 unemployment rate determination by now, but they are running behind and the letters won’t be posted on mytax.illinois.gov until January 5th, 2023. As soon as they do, you will need to update your payroll company’s records with the new unemployment tax rate, or it can cause expensive problems with reporting and reconciliations in the future. I wrote a blog on how to do this if you’re using Gusto for payroll.
HAPPY NEW YEAR, CHICAGO SMALL BUSINESSES: WE WOULDN’T BE A WORLD-CLASS CITY WITHOUT YOU!
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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.)
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.
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.
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.
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The change in law requires Payment Servicing Entities (PSEs) and Third-Party Settlement Organizations (TPSOs) such as PayPal, CashApp, Venmo, Etsy, Poshmark, and eBay to lower their reporting thresholds — from 200 transactions and $20,000 to anyone receiving $600 or more; a pretty massive net that would inadvertently ensnare plenty of folks who do not actually have taxable income, but who would be receiving a 1099-K under the new rules. As a result, many who sold personal items at a non-deductible loss might end up with unexpected tax filing requirements. The point of the changes was to catch the many “side hustles”, where folks are providing services or buying and reselling goods on online platforms, in cases where the taxpayer is either intentionally or unintentionally evading taxes on the unreported income.
Although the intention was made in good faith to close the tax gap and encourage under-reporters to comply with the law, the unintended consequences threatened to overburden already struggling IRS representatives, accountants and bookkeepers, and their small business clients.
Contrast a side gig where someone is buying items from thrift stores and reselling them on Etsy for a sizable profit — a taxable event — with someone who is cleaning out their childhood home and selling their family’s old clothing and housewares at a loss. Both would receive a 1099-K, but the second person isn’t running a business, and the loss isn’t deductible. However, if either of these folks doesn’t declare the income, they can expect an underreporting notice from the IRS. At the end of the day, the person selling old personal possessions would get a “pass” from the IRS, but not before having to deal with confusing and scary notices, resulting in required responses that won’t be reviewed for months, given the backlog of unprocessed snail mail that persists at the IRS.
You can imagine why so many of us were concerned about this imminent change — statements from the AICPA, NATP, National Taxpayers Union Foundation and other professional organizations made it clear that the burden on the beleaguered IRS and tax preparers was simply unreasonable, and the timeframe for implementation too short. Some issuers were going to be issuing exponentially more forms than previously and did not have the systems in place yet to manage the increase. Per the NATP, “the new rules create an undue burden on taxpayers and the IRS, which is still wading through a backlog of returns.”
To be clear: the delay in implementing these lower thresholds for receipt reporting on a 1099-K does not mean that income from providing services or buying and reselling goods is not taxable. It already was, it continues to be, and starting next year, it will be much harder for those trying to shirk their reporting responsibilities to do so.
For 2022, reporting in early 2023, the existing 1099-K reporting threshold of $20,000 in payments from over 200 transactions will remain in effect.
But the year’s delay gives taxpayers and their advisers more time to set up bookkeeping systems — especially for those who have not previously recognized that this type of income is in fact taxable — and allows the IRS some time to catch up on their backlog and come up with an approach for mitigating the countless numbers of folks who do not have reporting responsibilities but will likely get caught with an underreporting notice. Similarly, those taxpayers using Payment Servicing Entities like PayPal can use the extra time to get educated about what types of receipts are NOT taxable — gifts, for example, or resale of your own personal goods at a loss — and work with their PSE to make sure they’re processing these types of receipts in a way that is more likely to exempt them from receiving a 1099-K (hopefully PayPal, Venmo and the like will set up more clearly established instructions about “personal” vs “business” transactions).
I, for one, am glad for the opportunity to get back to spending my time working with clients on value-added activities, such as tax planning and managerial decision-making — rather than jumping through more compliance hoops — after a very long three years.
