Overview: Administrators can report 2% shareholder benefits from the Buddy Punch website. These benefits must be added to payroll so they are included in the employee’s taxable wages and properly reported on year-end forms, as required by the IRS.
Important! Employees must be flagged as 2% shareholders before processing payroll to ensure their benefits are recorded correctly.
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What are 2% Shareholders, S-Corps, and Single-Member LLCs?
Certain fringe benefits for employees classified as 2% shareholders of S-Corporations are treated differently from traditional employee benefits.
These employees are not eligible for Section 125 cafeteria plans, and their benefits cannot be deducted on a pre-tax basis. Single Owner LLCs can also elect to be taxed as 2% shareholders.
2% Shareholder: An individual who owns more than 2% of a corporation’s outstanding stock or voting power. This classification extends to spouses, children, and grandchildren of the shareholder.
S-Corporation: A closely held corporation that passes income, losses, deductions, and credits to shareholders for federal tax purposes while being responsible for tax on certain built-in gains and passive income.
Single-Member LLC: A limited liability company with a sole owner that has elected to be taxed as an S-corporation.
Flagging 2% Shareholders in Buddy Punch
Before processing payroll, ensure the employee is flagged as a 2% shareholder:
1. Navigate to the Employee Info tab within Buddy Punch. Click Edit.
2. Scroll to the bottom of the Employee page.
3. Locate the option to mark the employee as a 2% shareholder and update the status accordingly:
Updating 2% Shareholder Benefits (Medical and HSAs)
To report 2% shareholder medical benefits and HSAs via Buddy Punch, follow these steps:
Select Create payroll.
In the Run Payroll Component, choose Off-cycle payroll.
The pay date for this payroll must be within the current year.
Set the Period Start, Period End, and Pay Date, then click Create payroll.
On the next screen, select all applicable 2% shareholders.
Click Choose an earning type and add either:
2% Shareholder Benefit
2% Shareholder HSA
Assign a workplace, ensuring that both the Earning Rate and Hours fields remain unchanged (these fields are not applicable).
After adding all relevant earnings, click Save Draft, then Preview Payroll:
8. Before submitting, confirm that:
Net wages are $0
The Taxes and Benefits tab is empty
9. Click Submit Payroll to finalize the process:
Updating 2% Shareholder Group-Term Life (GTL)
To report 2% shareholder group-term life (2%SH GTL) benefits, follow these steps:
Unlike medical benefits and HSAs, 2%SH GTL must be reported with regular or supplemental payroll to avoid a negative net pay scenario.
The previous method using the Run Payroll Component will not work unless the employer agrees to gross up the amount.
Report 2%SH GTL using the existing group_term_life earning type. The only difference is that employers must input the full Group Term Life Premium amount instead of just the portion exceeding $50,000, as typically required.
Buddy Punch does not calculate this amount—employers must provide the total premium value.