Hi Zoho Payroll community,
We're running Zoho Payroll (US, Oregon) for an S Corporation and have encountered what appears to be a bug — or at minimum an undocumented design limitation — with the "Two Percent ShareHolder Benefits" preset earning type. Posting here in case others are affected and to add visibility alongside our open support ticket (Ticket ID: 158806303).
What we're seeing
When the "Two Percent ShareHolder Benefits" earning is included in a pay run, the amount appears to be excluded from the Federal Income Tax (FIT) withholding base and the State Income Tax (SIT) withholding base, as well as the Oregon Statewide Transit Tax base. FICA (Social Security/Medicare) exclusion is correct — that's expected per IRS Notice 2008-1. The W-2 Box 1 reportability appears correct on paper. But no FIT or state SIT is being withheld on the amount.
Why this matters
Per IRS Notice 2008-1, 2% shareholder health insurance premiums paid by an S-Corp must be:
- Included in the shareholder-employee's W-2 Box 1 wages (Zoho appears to do this correctly)
- Subject to federal income tax withholding (Zoho appears NOT to do this)
- Exempt from Social Security and Medicare (Zoho correctly does this)
The result is significant under-withholding each pay period on the shareholder-employee's FIT and state income tax.
Configuration confirmed
- Earning type: "Two Percent ShareHolder Benefits" (Zoho preset, not a custom component)
- "This is a taxable earning": checked
- No per-tax taxability matrix is exposed in the UI — there are no editable flags to override this behavior
- Employee's W-4 is otherwise correct (2020 form, standard MFJ setup)
- Employee's Additional Information correctly shows "2% Shareholder of an S corporation: Yes"
- Issue reproduced across multiple pay runs
Comparison with another platform
On our prior payroll platform, this earning type was correctly configured out of the box: FICA-exempt, but included in the FIT and SIT withholding base. The Zoho preset does not appear to replicate this behavior.
Workaround in use
We have added manual additional withholding to the employee's W-4 fields as an interim measure, but this does not resolve the underlying W-2 Box 1 computation question or provide a scalable fix for other S-Corp operators who may not realize this is happening.
Questions for Zoho or community members
- Is this a known issue or intentional design? If intentional, what is the rationale?
- Is there a supported way to configure the earning type to include the amount in the FIT/SIT withholding base while keeping it FICA-exempt?
- Has anyone found a working alternative setup (e.g., a different earning type + deduction pair) that handles this correctly?
Support ticket 158806303 is open in parallel. Would appreciate any input from others running S-Corp payroll through Zoho US Payroll.