Change an employee's 2% shareholder status - S-corps

If you’re updating an employee’s shareholder status to 2%, and it’s the beginning of the calendar year, follow these steps:

1. Go to the People section.
2. Click on your employee's name.
3. In the Job tab, find the "Work" section.
4. Next to “Work” click Edit. 
5. Choose Yes in the “2% Shareholder” dropdown—this means the shareholder is a greater than 2% owner of the company.
   • If you do not see the option to set someone up as a 2% shareholder: Message us from the section of your account.
   • To change the designation to “No” after it's already been set to "Yes," you'll need to message us from the section of your account so we can work through tax implications with you.
6. Click Save.

If you’re updating an employee’s 2% shareholder status mid-or-end of the year, and they have NOT received pre-tax benefit deductions so far  (e.g., your company has not been withholding health insurance premiums), learn how to fix the benefit totals below:

1. Go to the People section.
2. Click on your employee's name.
3. In the Job tab, find the "Work" section.
4. Next to “Work” click Edit. 
5. Choose Yes in “2% Shareholder” dropdown—this means the shareholder is a greater than 2% owner of the company.
   • If you do not see the option to set someone up as a 2% shareholder: Message us from the section of your account.
   • To change the designation to “No” after it's already been set to “Yes,” you'll need to message us from the section of your account so we can work through tax implications with you.
6. Process a benefits correction for the shareholder—when creating the benefit for your 2% shareholder, you’ll need to put in the year-to-date amount that should be reported on your W-2s for this year. Add the total year-to-date amount as the “Company Contribution Per Pay Period”.
7. Once the correction is processed, either disable the benefit entirely by removing it, or adjust the amounts to reflect the per-payroll contribution amount that you’d like to apply to future payrolls—this will make sure the deductions and contributions are being recorded for your employees' W-2s moving forward.

If you’re updating an employee’s 2% shareholder status mid-or-end of the year, and they HAVE received pre-tax benefit deductions this calendar year (e.g., your company withheld health insurance premiums)—our team will need to help with adjusting their benefits as there are tax implications.

Message us from the  section of your account, and include:

• The names of the employees who are 2% shareholders
• The year-to-date benefit totals medical, dental, or vision

Our team will get in touch with next steps.

C-Corporation employees who are also shareholders do not need a special designation in payroll. They are treated the same as all other employees for wages, benefits, and payroll taxes.

Do I need to mark employees as shareholders in Gusto?

No. For C-Corporations, shareholder-employees are treated just like regular employees. They receive the same payroll tax treatment.

They are eligible for all standard pre-tax benefits without restrictions.

How is this different for S-Corporations?

S-Corp shareholders with more than 2% ownership must be designated. These shareholders are treated as partners for fringe benefit purposes.

Most pre-tax benefits become taxable income for them.

What this means for your payroll

Set up C-Corp shareholder-employees as regular employees in Gusto. They automatically qualify for full pre-tax benefit eligibility.

No special payroll rules or restrictions apply.