Single-Member LLC taxed as S-Corp - Owner's HSA contribution

[dandarc]

Just confirming my understanding is correct - my one-person-and-only-one-person LLC taxed as an S-Corp has made an HSA contribution on my behalf this year. As I understand it, what is supposed to happen is this:

Include HSA contribution in W2 box 1 (subject to income taxes, but not FICA)

Deduct it on 1120S like other wages / benefits paid so it is excluded from corporate income that gets passed through

Deduct HSA contribution on personal return


The way the payroll software I'm using works, this winds up lumped-in with Shareholder Medical Premiums, which are treated the same way - included in Box 1 income, but not the SS / Medicare wage boxes, then deducted on personal return. And then the total of both Medical Premiums and HSA gets reported in Box 14 (notated as "Other"). I think this is all fine - so long as tax paid is correct at the end of the day, I don't think I need to be too worried about exactly what Box 14 says.

I guess the question is - does this look correct to others? 2021 is my first year with S-Corp taxation, so mainly posting to try and double-check my understanding.

[SeattleCPA]

That works just fine... As you note, you get the right numbers.

Also, and maybe someone will point to an IRS resource that provides an authoritative answer, but I don't think there's any great IRS guidance on how to do this.

BTW what you're doing is smart and highlights a subtlety many folks miss: While some people say a one person S corporation doesn't work because it needs to pay out all its profit as wages, that's just not true.

For example, consider these two options if someone's small business earns $100K...

Operate as a sole proprietor and the business owner pays the 15.3% SE tax on 92.35% of the $100K. So roughly $14K?

Operate as an S corporation that pays $60K in wages, $12K in health insurance, an $8K HSA... that's $80K in box 1 W-2 wages... add an employer pension match of 25% of the $80K which is another $20K... in this situation, even though all the profits have been paid out as wages or fringe benefits, business owner only pays 15.3% FICA on $60K. Or roughly $9K?

So in this extreme example, S corp savings roughly equal $5K. And of course, you probably wouldn't need to pay out all the profits as wages or benefits...

[dandarc]

I was about to ask a question about S-Corp showing a small loss (partial year - 8 months expenses paid but only 7 months revenue will be received by 12/31, unless something unexpected happens in 2022, I'd think the business will show a fairly healthy profit even after health insurance, HSA, 401K going forward), but upon further review if I max out the employee 401K, then I should be showing a few hundred dollars profit even after the 25% match on the W2 box 1 figure. So that December 31 payroll will include the last $4250 in employee contributions - I was waffling on this but it really makes sense to ensure I'm able to max out employer 401K without showing a loss.

So hypothetically, and perhaps for others, how big of a deal would a few hundred to a few thousand dollar loss be for year 1 with a new S-Corp? I know that showing ongoing losses are likely a problem, but wondering if year 1 gets any special scrutiny?

[SeattleCPA]

I was about to ask a question about S-Corp showing a small loss (partial year - 8 months expenses paid but only 7 months revenue will be received by 12/31, unless something unexpected happens in 2022, I'd think the business will show a fairly healthy profit even after health insurance, HSA, 401K going forward), but upon further review if I max out the employee 401K, then I should be showing a few hundred dollars profit even after the 25% match on the W2 box 1 figure. So that December 31 payroll will include the last $4250 in employee contributions - I was waffling on this but it really makes sense to ensure I'm able to max out employer 401K without showing a loss.

So hypothetically, and perhaps for others, how big of a deal would a few hundred to a few thousand dollar loss be for year 1 with a new S-Corp? I know that showing ongoing losses are likely a problem, but wondering if year 1 gets any special scrutiny?

I wouldn't worry about that at all.

[dandarc]

Thanks - never even close to having a business loss before. Strange, strange year.

Crazy to think we will have over $140K in "total income" depending on how you calculate that and between the covid-relief expanded premium tax credits and maxing the usual deductions, will likely owe $200-300 total in federal income tax for 2021. Gonna be the largest tax refund ever since I didn't know I'd be making this downshift move mid-year and had $7,000 withheld from the job I had on 1/1/2021 before that finished up at the end of April. And that is if our solar panels are not put online until January (BBB from house seems like this would probably be good for us, although I wouldn't mind yet more tax credit for 2021 if the city decides to come by before 12/31), and I decide not to do some manufactured spending in January before I file everything - tax payments are my favorite way to do that, but it only works well if you can file and get the money back pretty quickly.

[SeattleCPA]

Strange, strange year.

+1

[dandarc]

Glad I got started on this stuff early - poking around in TurboTax Business and found out I made a pretty big error that I still have time to correct. Took a distribution a few months ago that exceeds basis and therefore a significant portion would have been taxable.  Original capital contribution was $1300 to provide some initial buffer and cover start-up expenses, then business will have ordinary income of about $2,000 at the end of year so ~$3300 basis, but I took out $9000 to ease some cash flow issues in the personal accounts. But I was looking and saw "items that adjust basis" on the draft schedule K and learned something new.

Now to add some capital into the S-Corp so that isn't a problem - appears that I have a $2,000 limit on outgoing bill pay from personal account and a $1250 limit on ACH pull with the business account. So at least 2 days & 4 transactions to move the amount of money I want to move.

[sonofsven]

Glad I got started on this stuff early - poking around in TurboTax Business and found out I made a pretty big error that I still have time to correct. Took a distribution a few months ago that exceeds basis and therefore a significant portion would have been taxable.  Original capital contribution was $1300 to provide some initial buffer and cover start-up expenses, then business will have ordinary income of about $2,000 at the end of year so ~$3300 basis, but I took out $9000 to ease some cash flow issues in the personal accounts. But I was looking and saw "items that adjust basis" on the draft schedule K and learned something new.

Now to add some capital into the S-Corp so that isn't a problem - appears that I have a $2,000 limit on outgoing bill pay from personal account and a $1250 limit on ACH pull with the business account. So at least 2 days & 4 transactions to move the amount of money I want to move.

Could you write a check to yourself, deposit with mobile, and bypass the limits?

[dandarc]

Glad I got started on this stuff early - poking around in TurboTax Business and found out I made a pretty big error that I still have time to correct. Took a distribution a few months ago that exceeds basis and therefore a significant portion would have been taxable.  Original capital contribution was $1300 to provide some initial buffer and cover start-up expenses, then business will have ordinary income of about $2,000 at the end of year so ~$3300 basis, but I took out $9000 to ease some cash flow issues in the personal accounts. But I was looking and saw "items that adjust basis" on the draft schedule K and learned something new.

Now to add some capital into the S-Corp so that isn't a problem - appears that I have a $2,000 limit on outgoing bill pay from personal account and a $1250 limit on ACH pull with the business account. So at least 2 days & 4 transactions to move the amount of money I want to move.

Could you write a check to yourself, deposit with mobile, and bypass the limits?

Maybe - haven't tried. Would have to find a checkbook being the main problem there. Completely an MPP though - "I need to spend 5 minutes per day for 3 days to do something I think I should be able to do in 5 minutes once. Woe is me."

[SeattleCPA]

Glad I got started on this stuff early - poking around in TurboTax Business and found out I made a pretty big error that I still have time to correct. Took a distribution a few months ago that exceeds basis and therefore a significant portion would have been taxable.  Original capital contribution was $1300 to provide some initial buffer and cover start-up expenses, then business will have ordinary income of about $2,000 at the end of year so ~$3300 basis, but I took out $9000 to ease some cash flow issues in the personal accounts. But I was looking and saw "items that adjust basis" on the draft schedule K and learned something new.

Now to add some capital into the S-Corp so that isn't a problem - appears that I have a $2,000 limit on outgoing bill pay from personal account and a $1250 limit on ACH pull with the business account. So at least 2 days & 4 transactions to move the amount of money I want to move.

@dandarc ... You very possibly have miscalculated your basis.

The only way you could have made a distribution in excess of basis is if your S corp borrowed money which you then used (directly or indirectly) to make a distribution.

Very possibly you've missed increases to basis? Such as from additional contributions of capital? Or from your PPP Loan?

[dandarc]

@SeattleCPA - TurboTax was pretty clear about the employer retirement contribution being "paid or payable for 2021" -  I was planning on actually making the transfer sometime in 2022 originally. I guess that "payable" vs. "actually paid" is something I could have adjusted for on the basis computation.

I wound up just putting $8,000 into the business in early December, then actually doing that 401k transaction before the end of the year just to get it all over with. On 1/1/2022, had about $850 in the business account and that matches the basis computation I'm seeing in Turbotax.

Now if I could actually file the return - you wouldn't happen to know when 1120S and such are going to be open for filing? Turbotax continues to simply report "soon".

[SeattleCPA]

@SeattleCPA - TurboTax was pretty clear about the employer retirement contribution being "paid or payable for 2021" -  I was planning on actually making the transfer sometime in 2022 originally. I guess that "payable" vs. "actually paid" is something I could have adjusted for on the basis computation.

I wound up just putting $8,000 into the business in early December, then actually doing that 401k transaction before the end of the year just to get it all over with. On 1/1/2022, had about $850 in the business account and that matches the basis computation I'm seeing in Turbotax.

Now if I could actually file the return - you wouldn't happen to know when 1120S and such are going to be open for filing? Turbotax continues to simply report "soon".

I responded to this before... but then must not have clicked "post." But to try again...

First, I think what's happening with your pension and basis issue maybe goes like this. (I'm simplifying and using round numbers to make this easier to understand.)

So say you start and end the year with a zero cash balance. E.g., your business generates $100K in revenues, incurs $50K in expenses, and then distributes the remaining $50K to shareholder.

If you then add another deduction to the tax return--say a $10K SEP-IRA deduction--I think what happens is TurboTax must know that at year end, S corporation owes (or has in effect borrowed) money. I.e., it owes $10K to SEP-IRA because it has deducted the $10K SEP-IRA contribution on the return.

And then in effect, that means the S corporation is indirectly using borrowed funds to make a distribution. And that creates the distribution in excess of basis--$10K in this example--which in turn creates a LT capital gain.

Two comments about this particular issue:
1. It will reverse itself eventually when you close the S corporation if you do your accounting correctly and track this on your tax returns. Some day in the future, you'll book an offsetting $10k LT capital loss.
2. You won't want to do this though... I.e., you want to leave some cash in the business and accumulate some basis. This is also an example of the sort of trouble or trap an alert tax accountant would have helped you dodge. (I am always a proponent of folks DIYing their returns with something like TurboTax... but once you start dealing with stuff like S corporations, I think it's beyond DIY...)

P.S. Regarding when you can e-file an S corporation return... I think I saw IRS says that'll open next week?

[terran]

Interesting. My understanding is that for employee HSA contributions to avoid FICA they need to be made through a section 125 "cafeteria" plan set up by the employer. Does having the S-Corp make the contribution directly instead of contributing as an employee avoid this requirement?

[SeattleCPA]

Interesting. My understanding is that for employee HSA contributions to avoid FICA they need to be made through a section 125 "cafeteria" plan set up by the employer. Does having the S-Corp make the contribution directly instead of contributing as an employee avoid this requirement?

We're talking just about more than 2% shareholder-employees of an S corporation. And for those folks, basically an HSA contribution looks like SE Health insurance.

Here's something interesting about the FICA angle. These extra little bits really change the optics and the savings of an S corporation. And dial down the risks some people worry about.

E.g., say someone makes (say) $100K. One worker operation. Some people worry the person will have to pay all that as salary. But if the base salary equals (say) $60K and then health insurance equals (say) $12K and then the HSA equals (say) $8K and then you see a employer pension plan contribution of $20K (which would be the max), no distribution has even occurred and yet the shareholder employee saves roughly $6K in payroll taxes.

[dandarc]

@SeattleCPA - TurboTax was pretty clear about the employer retirement contribution being "paid or payable for 2021" -  I was planning on actually making the transfer sometime in 2022 originally. I guess that "payable" vs. "actually paid" is something I could have adjusted for on the basis computation.

I wound up just putting $8,000 into the business in early December, then actually doing that 401k transaction before the end of the year just to get it all over with. On 1/1/2022, had about $850 in the business account and that matches the basis computation I'm seeing in Turbotax.

Now if I could actually file the return - you wouldn't happen to know when 1120S and such are going to be open for filing? Turbotax continues to simply report "soon".

I responded to this before... but then must not have clicked "post." But to try again...

First, I think what's happening with your pension and basis issue maybe goes like this. (I'm simplifying and using round numbers to make this easier to understand.)

So say you start and end the year with a zero cash balance. E.g., your business generates $100K in revenues, incurs $50K in expenses, and then distributes the remaining $50K to shareholder.

If you then add another deduction to the tax return--say a $10K SEP-IRA deduction--I think what happens is TurboTax must know that at year end, S corporation owes (or has in effect borrowed) money. I.e., it owes $10K to SEP-IRA because it has deducted the $10K SEP-IRA contribution on the return.

And then in effect, that means the S corporation is indirectly using borrowed funds to make a distribution. And that creates the distribution in excess of basis--$10K in this example--which in turn creates a LT capital gain.

Two comments about this particular issue:
1. It will reverse itself eventually when you close the S corporation if you do your accounting correctly and track this on your tax returns. Some day in the future, you'll book an offsetting $10k LT capital loss.
2. You won't want to do this though... I.e., you want to leave some cash in the business and accumulate some basis. This is also an example of the sort of trouble or trap an alert tax accountant would have helped you dodge. (I am always a proponent of folks DIYing their returns with something like TurboTax... but once you start dealing with stuff like S corporations, I think it's beyond DIY...)

P.S. Regarding when you can e-file an S corporation return... I think I saw IRS says that'll open next week?

I forgot to hit send on an "I'm out sick today" message this morning then proceeded to sleep another 4 hours instead of going to work. And great news in terms of filing - always a little frustrating to have entered everything and reviewed multiple times, only to find out you cannot send the forms in yet.

And thanks for the continued help - that is indeed what happened. When I decided to go ahead with the 401k contribution, I even created a liability on my books, knowing funds weren't there to pay it until later. So yes - paid a distribution with borrowed funds makes a lot of sense. I'll certainly never make this particular mistake again, and I did figure it out before year end so I was able to return most of the distribution to make it work in a straightforward way.