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Small Bus S-corp owner with HSA contribution in box 12 should it not be in box 14 ?

Home Insurance Small Bus S-corp owner with HSA contribution in box 12 should it not be in box 14 ?

  • Avatar newbie123 
    Participant
    Status: Small Business Owner
    Posts: 5
    Joined: 08/09/2019

    My husband and I have started a business later part of 2018 and generated a payroll run with Xero : 

    Looking at my husbands W2 something seems off after I researched HSA contributions for Scorp owners:

    Could a Small business CPA / Accountant please chime in since Xero where the payroll run and W2 was created is of no help :

    My W2 is for the same amount and deduction just without HI and HSA so mine seems to be ok but I believe my husbands needs a correction :

     

     

     

    Q: Scorp owner W2 – should HSA contribution be Box 12 or 14

     

    W2 seems to need correction please advise:

     

    LLC taxed as S-corp Owners receive a W2 .

     

    S-corp contributed to HSA and paid for Health  this is what current W2 looks like :

     

    Box 1: 54045

     

    Box 3 60000

     

    Box 5 60000

     

    Box 12a D – 18500

    Box 12b W 6900

     

    Box 14 CA-SDI 634.50

     

    Box 14 Scorp Health 12545

     

    Box 16 57495.64       (there was no other income or state involved )

     

     

    After reading up on the topic because something seemed off it seems 6900 should be in box 14 ?

     

     

    Could someone please look at the numbers and see of the entry that is currently in the boxes is correct or wrong and needs correction with a W2c ?

     

     

    If I need to switch 12 W to box 14 – do I need to change the number in Box 1, 3, 5 => meaning add the HSA to box 1 increasing wages by 6900  => making it 60945 for box 1 

    box 1  ($60,000) less 12a – retirement contribution ($18,500)   plus – 14  S corp health insurance  ($12545) + 6900 = taxable wages ($60,945)

    Do I add it to box 3 and 5 as well?

     

     

    Could someone chime in how the numbers are derived for an s-corp owner with retirement contributions , HSA and Health (both paid by S-corp) for BOX 1, 3, 5 .

    Also looking at box 16 shouldn’t this number not be the same  as box 1 . I am very confused on Box 16 .

    I want to make sure I understand all this since 2019 our wages to report are in the 6 figures for both of us and I want to make sure they are correct for this year.

     

    #237471 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1869
    Joined: 02/01/2016
    Q: Scorp owner W2 – should HSA contribution be Box 12 or 14?  Box 14

    Box 1: 54045, 3: 60000, 5: 60000, 12a D: 18500, 12b W: 6900, 14: CA-SDI 634.50, Scorp Health 12545, 16: 57495.64

    If I need to switch 12 W to box 14 – do I need to change the number in Box 1, 3, 5 => meaning add the HSA to box 1 increasing wages by 6900  => making it 60945 for box 1. box 1  ($60,000) less 12a – retirement contribution ($18,500)   plus – 14  S corp health insurance  ($12545) + 6900 = taxable wages ($60,945)?

    This is number is correct for Box 1. Note: Form 1120S Box Line 7 Officer Compensation should be equal to the value in W-2 Box 1.

    Do I add it to box 3 and 5 as well?

    NO, health insurance premiums and HSA contributions paid by or reimbursed by the S-Corp are included in Box 1 but not Boxes 3 & 5. However, pre-tax employee retirement plan deferrals do not reduce either Social Security or Medicare wages. In this case Boxes 3 & 5 should be $60,945 with the $18,500 pre-tax employee deferral added back in = $79,445.

    Also looking at box 16 shouldn’t this number not be the same  as box 1. Yes.

    I am very confused on Box 16 .

    Me too, because in this case the software is not treating the HSA contribution as a 2% shareholder-employee. It is treating it as a standard W-2 Box 12 entry. CA does not recognize the federal tax laws for HSA contributions and earnings. They are treated as after-tax contributions and earnings are fully taxable. The proper value for Box 16 should also be $60,945. What is weird is that $57495 is $3450 (1/2 of $6900) less that $60,945 which makes no sense.

    Click to expand…

    This most definitely needs to be corrected on a W-2C. The W-2 Box 1, 3, 5, 12 Code W and Box 14 are all incorrect:

    • Box 1 is $6900 too low and the $6900 should instead be reported on Form 8889 Line 2 instead of Line 9 and claimed on the Form 1040, Schedule 1, Line 25 HSA deduction. Note: The health insurance premium should be claimed on the Form 1040, Schedule 1, Line 29, Self-employed health insurance deduction.
    •  Boxes 3 & 5 are $18,500 too low and you will have underpaid your FICA. There may or may not be penalties for late payments.
    • Box 12 Code W is $6900 to high and will cause problems if you try to claim the deduction, because tax software will think you make a double contribution.
    • If it was just Box 14, I wouldn’t worry about it, because it is informational in nature, not required and not worth filing a corrected W-2C.
    #237623 Reply
    Avatar newbie123 
    Participant
    Status: Small Business Owner
    Posts: 5
    Joined: 08/09/2019

    spiritrider  – Thank you .

    I am shocked that a payroll software would create such a W2 .

    I am also shocked that a bookkeeper and CPA didnt catch it either.

    All this only came to my attention when I looked at Box 16 and it seemed off and then I started researching .

     

    Would you be able to let me know if I can find the information  on Form 941 or 940 to see if has been included or not ?

    Or can you direct me to where I could find the information ?

    Form 940

    Line 3 has

    172445      looks like it is 60k (wage husband) + 60K (wage wife ) + 33k employer match + 12545 Health + 6900 HSA

    Or can I find what I am looking for on another line on form 940 or any other form ?

    Thank you for taking the time and answering .

     

    One more question for Box 3 and 5 :  So basically what we took as a deferral we need to add back on and add it on top of the Gross pay  60K  Salary  plus the 18500 deferred pre tax ?

     

    Newbie here and trying to wrap my head around the fact that I set the salary to 60K salary for 2018 –  I deferred 18500 but it will be added back in to a total

    but I did not make more than 60K ?

    I thought

    Box 1 is made up of 60K – 18500 = 41500 plus the 12545 HI and 6900 =  60945

    Box 3 and 5 in my mind was the 60K gross pay since I can’t deduct the deferral for the employee retirement contribution

    Box 12 would be 18500  and remove /  take away the 6900 for HSA from box 12 and move it to box 14

    Box 14  I would now have  HI 12545   and HSA 6900

    and Box 16 seems like they did not apply the full Family coverage and only added half so basically change that to 60945

     

     

    #237773 Reply
    Avatar HumbleInvestor 
    Participant
    Status: Physician, Small Business Owner
    Posts: 182
    Joined: 12/28/2016

    Retirement contributions should. be part of box 3 and 5. 2% share holder ins premiums should be part of box 1.
    @spiritrider gave you info on what needs to be fixed. You should work with a competent CPA to get it fixed. before you get penalized.

    #237796 Reply
    Avatar DavidGlennCPA 
    Participant
    Status: Accountant
    Posts: 33
    Joined: 06/12/2019

    I disagree with what’s been said so far.

    The $6,900 of company paid HSA should be reported the same as company paid health insurance for the 2% shareholders.  That is, reported in Box 1 and Box 14 but NOT Box 3 or 5.  It’s subject to income tax but not social security or medicare tax.

    To reconcile Box 5 to Box 1, you do this: $60,000 – $18,500 + $12,545 = $54,045.  This proves Box 5 is correct as filed.

    As the W-2 is filled out now, the HSA contribution is already being deducted on the 1120S but hasn’t been included on the W-2 Box 1.  It would be a double deduction if you deduct on the 1040 without fixing the W-2.

    The right thing to do is to amend the W-2 and include the $6,900 in Box 1 and Box 14 and remove it from Box 12W.

    David Glenn, CPA | Glenn Advisory
    https://www.taxcpafordoctors.com | (808) 321-5664

    #237798 Reply
    Liked by newbie123
    Avatar newbie123 
    Participant
    Status: Small Business Owner
    Posts: 5
    Joined: 08/09/2019

    HumbleInvestor  This craziness was created by two professionals working in accounting.

    The first one entered all the stuff into the payroll software ect and then past away and the second one who took over did not notice the mistake either .

    It is not like I did not pay them the fair share since it wasn’t a free service – I did pay them an hourly rate on top of Tax preparation cost  and funny enough they were HIGHLY recommended BUT they did not catch this .

    So here I am trying to educate myself before I go out. Education is key to understanding I could have ignored it but something seemed off.

    Now I am trying to understand the correlation between the boxes and what forms they are reported on .

    The question still remains :

    Box 3/5 how is the number 79,445. derived and how come it can be higher than the regular set salary of 60K which was set for that first quater in business.

    #237799 Reply
    Avatar DavidGlennCPA 
    Participant
    Status: Accountant
    Posts: 33
    Joined: 06/12/2019
    • Box 1 shows the wages subject to income tax
    • Box 3 shows the wages subject to social security tax
    • Box 5 shows the wages subject to medicare tax
    • Company paid health insurance for 2% or more shareholders are subject to income tax but not social security or medicare taxes
    • Company paid HSA contributions for 2% or more shareholders are subject to income tax but not social security or medicare taxes
    • Salary deferrals are not subject to income tax but are subject to social security and medicare taxes

     

    The presence of these three items on a single W-2 often causes confusion so it’s helpful to think about Box 1, 3, and 5 as separate buckets that get filled with different things.

    First we pour in the $60,000 of wages into each bucket.  But then we take out the $18,500 from Box 1 because it’s being deferred into a 401(k).

    Then we add the $6,900 HSA and $12,545 health insurance to Box 1 but not Boxes 3 or 5.

    Here’s what the W-2 should be –

    Box 1 – $60,945

    Box 3 – $60,000

    Box 5 – $60,000

    Box 14 – $12,545 SEHI

    Box 14 – $6,900 HSA

     

    Box 1 = $60,000 – $18,500 + $12,545 + $6,900 = $60,945

    David Glenn, CPA | Glenn Advisory
    https://www.taxcpafordoctors.com | (808) 321-5664

    #237804 Reply
    Liked by newbie123
    Avatar newbie123 
    Participant
    Status: Small Business Owner
    Posts: 5
    Joined: 08/09/2019

    DavidGlennCPA   Thank you very much for explaining this in such detail . I appreciate it very much .

    This means I will have to file a W2c to make the changes to the above mentioned boxes and also change box 16 to $60,945 since the software or person (accountant)  who entered it did not account or enter the full HSA 6900 contribution.

    The difference of $3,450 in box 16 with current amount of $57495 implies that the HSA contribution was only $3,450 which is the limit for self-only HDHP coverage not $6,900 for family HDHP coverage.

    Since we had a family HDHP the entire 6900 should be accounted for and therefor the amount of box 16 should also be corrected to $60,945 like Box 1.

     

    As far as Form 940 since the numbers are entered on it no correction is needed am I correct ?

    Form 940

    Line 3 has

    172445      looks like it is 60k (wage husband) + 60K (wage wife ) + 33k employer match + 12545 Health + 6900 HSA

    Thank you for taking time out of your day to help a Newbie like myself understand all this better .

    #237806 Reply
    Avatar DavidGlennCPA 
    Participant
    Status: Accountant
    Posts: 33
    Joined: 06/12/2019

    I can’t determine where the Box 16 amount came from but I don’t see a reason why it should differ from Box 1.

    I wouldn’t worry about Form 940.  You’re both over the $7,000 wage base so it doesn’t make a difference in the tax being paid.

     

    While technically incorrect, the shorter path to the same result is to amend the W-2s but only fix Box 16 to match Box 1 as it’s currently filed.

    The HSA not being included in Box 1 is only a problem if you claim an HSA deduction on your 1040.  If you don’t claim an HSA deduction on your 1040, there’s no difference than doing it the technically correct way.

    Box 16 being off is a problem because it affects how much state income taxes you pay.  It takes only amending the W-2s to fix that.

    If you wanted to fix Box 1 you’d have to amend at least one Form 941 for the year in addition to the W-2s.

     

    I’m going to give a caveat here that I haven’t seen the forms to know for sure that what I’m telling you is correct.  But with my current understanding of the facts I’m giving correct information.

    Now you’re better armed to go back to your payroll person and get things straightened out.

    David Glenn, CPA | Glenn Advisory
    https://www.taxcpafordoctors.com | (808) 321-5664

    #237808 Reply
    Liked by newbie123
    Avatar newbie123 
    Participant
    Status: Small Business Owner
    Posts: 5
    Joined: 08/09/2019

    DavidGlennCPA  Thank you for the information. This was very informative and helpful.

    I will look into having them change the W2 for box 16  .

     

    Is there a advantage of doing one over the other ( reporting it in either box 12 or rather 14 and then increase box 1 as a result) ?

    My understanding was that the Scorp owner needs to have it in Box 14 as per IRS :

    “The S Corporation is allowed a tax deduction for the wages paid (including health insurance premiums and HSA premiums) and the shareholder is allowed a deduction on his/her personal tax return for the health insurance premiums and HSA premiums included in their wages. There is no additional tax resulting from this treatment. The net effect is exactly the same as in previous years; it’s just a different way of reporting which is now required by the IRS.”

     

    If 941 are changed to include the HSA what lines are affected for the change .

    I assume it is Line 2 on the 941 that would have to have all the amounts entered meaning : Wages , and the SEHI for the quarter  as well as the HSA contribution.  Does line 2 on the 941 include the employ-er retirement contributions as well?

    If changes are made to W2 only for box 16 I would not need correction for CA 9c form?

     

    #237809 Reply
    Avatar DavidGlennCPA 
    Participant
    Status: Accountant
    Posts: 33
    Joined: 06/12/2019

    You’re welcome.  Glad I can help.

    There’s no difference in the end result, just one way is technically correct and the other is not.

    Box 14 is the right place.

    You’d have to file Form 941-X and Line 6 of that form is where the change is reported.

    We’re getting too much into the weeds for a forum reply to be reliable.  I’d take this info back to your payroll person and have them file the W-2C and any state forms as needed.

    David Glenn, CPA | Glenn Advisory
    https://www.taxcpafordoctors.com | (808) 321-5664

    #237810 Reply
    Liked by newbie123
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1869
    Joined: 02/01/2016

    Sorry, I stand corrected. @davidglenncpa is correct. I went down a rat hole adding the $18,500 employee salary deferral back into the $60K wages for Boxes 3 & 5. When it had not been deducted from those wages in the first place.

    So David is correct that the only real problems are Boxes 1, 12W, 14 and 16.

    However, I still believe Box 16 has to be amended to $60,945 regardless if Boxes 1, 12 and 14 are corrected. California does not recognize federal HSA tax treatment.

    While the net federal income taxes will be the same whether Boxes 1 & 12 are fixed or not. A pass-thru business owner can not receive pre-tax health and welfare benefits from the business. That is the whole purpose of the S-Corp shell game to pay or reimburse, report as compensation but not FICA wages and claim the deductions on Form 1040.

    OP, I agree with you that it is crazy that here 15 years after HSAs were enacted, there are payroll software issues that still don’t handle S-Corp 2% shareholder-employee HSA contributions successfully. Note: This could have been the CPAs and not the software, but I can tell you there is still payroll software out there that doesn’t handle this properly.

    #237811 Reply
    Liked by newbie123

Reply To: Small Bus S-corp owner with HSA contribution in box 12 should it not be in box 14 ?

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