S Corporation Payroll: Everything You Need to Know
S corporation payroll for one employee, usually the primary manager or director of the company, is often paid as the employee's annual salary.3 min read
2. Set a Reasonable Salary Amount
3. Prepare your Federal Quarterly Payroll Tax Returns
4. Record the Payroll Transactions in an Accounting Program
5. Prepare your State and Federal Payroll Tax Returns
6. Take Care of any Shortfalls in your Taxes
7. Prepare All of your End-of-the-Year Payroll Tax Forms
8. Why Do S Corporation Owners Need to be on Payroll?
Steps in Preparing an S Corporation Payroll for One Employee
S corporation payroll for one employee, usually the primary manager or director of the company, is often paid as the employee's annual salary. On average, a salary of $40,000 is paid to a single shareholder-employee, though not every company can necessarily afford this amount. To make the payroll process easier, you can follow the steps below to set up your company's payroll.
Set a Reasonable Salary Amount
It is important to realize that if you set the salary lower, you can save money on payroll taxes, but the amount will need to be considered reasonable to not raise issues with the IRS. The amount you will need to withhold will be related to the tax bracket in which the salary falls and the number of exemptions that are claimed.
Prepare your Federal Quarterly Payroll Tax Returns
If your quarterly payroll taxes are less than $10,000, you will not need to send them in until you file your quarterly payroll tax 941 form. Once you complete this form, you will need to include a check for the amount you owe along with your 941-V coupon and send it in before the filing deadline.
Record the Payroll Transactions in an Accounting Program
When you pay yourself and your employees, you will need to enter the transaction into an accounting software as wage expenses. You will also need to record any disbursements to shareholders. Dividends and other disbursements will need to be categorized as distributions.
Prepare your State and Federal Payroll Tax Returns
Depending on which state you live in, you may or may not need to file additional tax returns for a one-person shareholder corporation. The Secretary of State's office will usually send corporations information on how to prepare these returns to prevent any confusion.
Take Care of any Shortfalls in your Taxes
If you realize that paying your federal taxes will not be enough to cover the taxes you owe, you should begin making quarterly estimated tax payments by using the IRS 1040ES form. Once you have determined what your tax shortfall will be for the year, you should divide that amount into quarterly payments on your estimated tax form. That way, the payments are documented and you can budget accordingly.
Prepare All of your End-of-the-Year Payroll Tax Forms
Even after you have performed all of your quarterly reporting, you will be required to prepare some final year-end tax forms to report your total payroll to the IRS for the year. Forms that you can expect to complete for payroll throughout the year will include:
- A 940 Federal Unemployment Tax Return.
- Year-end W-2 and W-3 transmittal forms recording employee's yearly earnings.
- Depending on the state, you may have additional forms to file for payroll taxes at year end.
If you are not comfortable filling out all of the year-end paperwork, you can outsource it to a payroll company or hire a corporate accountant.
Why Do S Corporation Owners Need to be on Payroll?
When an S corporation is formed, it is expected that at least one of the owners will be involved in the day-to-day operations of the company either as a manager or company director. Because of this, these owners will be expected to be paid what would be considered a reasonable salary for the position.
The IRS will expect to see a W2 at the end of the year showing this salary on the owner's personal tax return. The payroll taxes paid through this salary will include the owner's Social Security and Medicaid liability. In other corporation structures, this liability is often paid through self-employment taxes that are filed by sole proprietorships or partnerships.
It is important that when owners decide on the salary they will be paid that they pick a reasonable amount for the position. Since an S corporation owner's FICA liability is determined by their salary amount, the IRS will be expecting a salary at least close to the average. Salaries that are considered too low may send up red flags at the time returns are filed, which could result in a company audit.
If you need help calculating your S corporation's payroll, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.