Running a business means not only focusing on your core products or services but also juggling administrative responsibilities, tax filings, and yes—payroll. If you own an S corporation (S-corp), managing payroll might feel like an extra layer of complexity in an already demanding role. It’s natural to feel stressed or unsure about what steps to take or how to comply with government regulations.
The good news is that understanding S-corp payroll doesn’t have to be as intimidating as it sounds. In this article, we’ll explore what payroll entails for S-corporations, why it’s essential, and how to navigate it easily. At Paper Trails, we specialize in guiding small business owners through payroll challenges such as these. Let’s break it all down.
S-corporations are a unique type of business structure that provides the liability protections of a corporation with some of the tax benefits of a partnership. A key feature of an S-corp is pass-through taxation. This means the company’s profits or losses pass directly through to the owners’ personal tax returns, avoiding the “double taxation” imposed on traditional corporations.
However, this tax-friendly business structure comes with some complexities, particularly when it comes to payroll. If you’re an owner-employee of an S-corp, the IRS requires you to pay yourself a reasonable salary. This rule is intended to prevent owners from bypassing payroll taxes by paying themselves solely through profit distributions, which aren’t subject to Social Security and Medicare taxes (known as FICA taxes). By paying yourself through payroll, you ensure compliance with tax regulations while demonstrating good business practices.
If you’re actively working for your S-corp—whether you’re managing operations, delivering services, or making strategic decisions—you’re considered an employee. As such, the IRS requires you to compensate yourself with a fair, market-based salary. This is where S-corp payroll becomes crucial to compliance.
Skipping payroll or underpaying yourself may save money in the short term, but it puts your business at risk for tax penalties, audits, or worse. The IRS might even reclassify your profit distributions as wages and demand back payments on unpaid payroll taxes. This is a headache you want to avoid.
By running payroll properly, you:
Running payroll for your S-corp might seem difficult, but it’s quite manageable if you break it into steps. Here’s how you can navigate the process:
Think of your EIN as your business’s Social Security number. It’s a unique identifier used on tax documents and payroll forms. Without an EIN, you can’t legally run payroll or file required tax forms. The good news? You can easily apply for one online through the IRS website.
Even if you’re the sole owner-employee of your S-corp, you’ll need to set up payroll tax accounts at both the federal and state levels. These accounts allow you to:
The key to compliance for S-corp owners is paying yourself a reasonable salary. But what does “reasonable” actually mean? According to the IRS, your salary should reflect what you would pay someone else to do the same job. Consider factors like:
For example, if you’re running a marketing agency and similar strategists in your area earn $70,000 annually, that figure might serve as a baseline for your salary. The key is to find a balance—underpaying yourself could trigger IRS questions, while overpaying might hurt your business’s finances.
Treat yourself like any other employee by processing payroll consistently. Decide on a pay schedule (e.g., weekly, bi-weekly, or monthly) and stick to it. This ensures not only compliance but also smoother financial planning for your business.
Payroll involves more than just writing yourself a paycheck. You’ll need to:
The perks of being an S-corp owner are in the tax advantages that come along with this type of business structure. Unlike sole proprietors or LLC owners who pay self-employment taxes on all income, S-corp owners only pay FICA taxes on their salary—not their distributions. For profitable businesses, this can mean significant tax savings over time.
For example, if your S-corp generates $150,000 in annual profit and you pay yourself a salary of $80,000:
This approach allows you to reduce your tax burden while staying compliant.
Payroll compliance doesn’t stop once you’ve paid yourself. S-corporations must file several key tax forms throughout the year, including:
Keeping accurate records of payroll transactions is essential—not just for tax filing but also in the event of an audit.
Yes, S-corps run payroll—and it’s an essential part of staying compliant and taking those tax benefits of this unique business structure. By understanding the process, determining a reasonable salary, and filing the necessary taxes, you’ll not only keep the IRS happy but also set your business up for long-term success.