S Corp Payroll Guide: Setting Up and Managing Payroll

What you can’t do is pull $100,000 in distributions over the year while claiming a $10,000 salary. And that means you don’t get to treat the business bank account like your personal ATM. You will want to hire an accountant and set up a payroll service https://www.bookstime.com/ to complete all of forms that you need to operate as an S Corporation.

K-1 Profits: Reporting Your Share of Income

As both employer and employee, you’re responsible for withholding, reporting, and remitting payroll taxes on your salary. These employment taxes include Social Security tax (12.4% total, with 6.2% withheld from your pay and 6.2% paid by the corporation) and Medicare tax (2.9% total, split similarly). Your S Corporation must also pay federal unemployment tax (FUTA) and state unemployment tax on your wages. Additionally, the business must withhold federal income tax and applicable state income taxes from your salary based on your W-4 elections. Proper management of these employment tax responsibilities requires meticulous record-keeping and adherence to filing deadlines to avoid penalties.

W-2 Salary vs. Distributions vs. K-1 for S-Corp Owners

• Many bookkeeping systems offer payroll but they do not automatically file the necessary forms for you, which leaves you on the hook for any late forms.
• Accurate documentation of employee compensation and related payroll expenses is pivotal for maintaining transparent financial records.
• Understanding and managing payroll taxes is essential for S Corporation owners to remain compliant and avoid penalties.
• There’s also payroll for one employee to make sure IRS obligations are taken care of.
• Important compensation is essential as it directly affects payroll taxes and ensures that S corp owners accurately report their earnings.

Another common scenario is where you might not be able to accurately predict your business activity for the year. For example, a real estate agent in March has no idea how much he or she will earn for the year. But in October and November, there is enough history to predict the future. What we do with this is use a small salary such as $500 per month to check the box, and s corp payroll then make adjustments in July and certainly in November.

Balancing salary and distributions

While the necessity of paying a reasonable salary is paramount for S Corp shareholders, dividend distribution rules also play a significant role in optimizing tax efficiency. S Corps have specific guidelines for distributing dividends, which can substantially impact shareholders’ tax obligations. Depending on the type of business, investing in corporate tax software may be worth considering as well.

S corps need to create a separate Schedule K-1 for each shareholder and send the corresponding copies to each shareholder and the IRS. Thus, employers must withhold 6.2% of an employee’s wages (up to $147,000) for Social Security taxes as well as contribute and remit their own 6.2%. In addition, employers and employees are each typically responsible for 1.45% of each employee’s total wages in Medicare taxes. Some business structures allow an owner’s draw — the ability for an owner to withdraw funds from the company for personal use — but S-corps are not allowed to do so.

• We take care of all federal, state, and local tax payments, report filings and W-2s for you and your CPA.
• Some states (like Washington State where I live) don’t require additional state quarterly payroll returns for shareholder-employees in one-person corporations.
• If you lower your salary, you might pay less tax now, but it could mean getting reduced Social Security benefits when you retire.
• For each pay period, your business must withhold federal income tax based on each employee’s W-4 form and the current withholding tables published by the IRS.
• The size and complexity of your business operations affect salary expectations, as does your geographic location since market rates vary regionally.
• Your business is also responsible for matching the 6.2% Social Security and 1.45% Medicare taxes withheld from employees.
• Evaluating the payroll implications is crucial when deciding between an S Corporation and an LLC for your business structure.

However, following shareholder salary requirements guarantees compliance with FICA tax obligations. Our payroll provider of choice is GUSTO—we think it’s perfect for eCommerce and Online Business owners. Since an S-Corp is defined by paying yourself a salary as an “employee” of your business, making the switch to an S-Corp status requires you to implement payroll immediately. There is no hard and fast rule, but we recommend looking at this “S-Corp” status as soon as you hit $30,000 net income annually. That said, it is an individualized situation and decision, because the state income tax piece can vary dramatically, as well as your individual income tax situation (outside of the business implications). Other opportunities for owner/employees of an S-Corp have to do with retirement contributions and planning.

An S Corp owner is characterized as a shareholder, and, if he or she works in the business, is also a W-2 employee. You may say, “oh my bookkeeping service also offers payroll, I’ll just go with that”. Many bookkeeping systems offer payroll but they do not automatically file the necessary forms for you, which leaves you on the hook for any late forms. As both an S corporation owner and employee, there are several pieces of paperwork that you will need to file with the IRS. You are, after all, your best employee, so let’s make sure you get this right. In this article, I will discuss the before, during, and after of how Certified Public Accountant to do payroll for a single member S corporation.

Step 7: Preparing the Year-end Payroll Tax Returns

• Shareholders pay income taxes on their earnings, but the business itself does not pay income tax.
• While the necessity of paying a reasonable salary is paramount for S Corp shareholders, dividend distribution rules also play a significant role in optimizing tax efficiency.
• Comparing these figures will help ensure that your compensation is competitive and reflective of the market.
• If you’re not active in your company’s operations and don’t provide services to the S-corp, you can receive compensation as distributions rather than a salary.
• The IRS defines reasonable compensation as the amount that would ordinarily be paid for like services by like enterprises under like circumstances.
• These taxes include the Federal Insurance Contributions Act (FICA) taxes, which encompass both Social Security and Medicare taxes.

For example,  ONESOURCE corporate tax software has modules for tax planning and preparation that can help streamline the process and make tax preparation more efficient. ONESOURCE can also automate indirect tax calculations, which is especially helpful if the business is selling a high volume of products or is doing business across state lines and is collecting sales tax. In any case, automating the most time-consuming aspects of the tax process can save money and give business owners peace of mind that their corporate tax filings and reports are as accurate as possible.

• You know where you want to go, but the path of how to get there is murky at best.
• Tax experts have calculated that 28.57% of business income should be paid as employee wages to maximize the pass-through deduction.
• If you want to give yourself a bonus at the end of the year (or after a killer quarter), you can do that.
• According to the Small Business Administration, the United States has over 34.7 million small businesses.
• Once a suitable figure is found, it may have to be adjusted to individual circumstances.
• This is especially important with an LLC that moves to elect to be treated as an S-Corp.
• Once you’re officially on payroll, new doors open, one of the best s corporation advantages in action.

Even with these guidelines, determining your salary definitely requires a personalized conversation. Moreover, your decision needs to be reevaluated at least annually (and sometimes sooner in a fast-growing business). An easy rule of thumb is that if you’re a 100% owner of the business, the salary amount should be between 1/3 and 1/2 of the annual net income (before the salary deduction) of the business. Whether you are an LLC or a sole proprietor, the net income of your business is treated as “self-employment” income and is taxed at 15.3% on top of your regular Federal and State regular income tax. Although S corps are pass-through tax entities, their tax reporting requirements require several filings.