Congratulations on establishing your S corporation! Now comes the task of setting up payroll, a crucial aspect of running your business. This guide will walk you through the process, ensuring you comply with regulations and pay yourself correctly.
Understanding S Corp Payroll Requirements
Before diving in, it’s vital to grasp the unique payroll requirements for S corporations:
| Requirement | Description |
|---|---|
| Reasonable Salary | As an S corp owner-employee, you must pay yourself a “reasonable salary” that reflects your role and industry standards. This salary forms the basis for payroll taxes and social security contributions. |
| Payroll Taxes | You’ll withhold and pay federal payroll taxes (Medicare and Social Security) on both your salary and any employee wages. Additionally, you’ll likely need to pay state and local payroll taxes. |
| S Corp Distributions | Profits remaining after paying salaries and taxes are distributed to shareholders (including yourself) as S corp distributions. These distributions are not subject to payroll taxes. |
| Employer Identification Number (EIN) | Obtain an EIN from the IRS to identify your business for tax purposes. |
Setting Up Your S Corp Payroll: A Step-by-Step Guide
- Choose a Payroll Provider: Explore options like online payroll services, accounting firms, or payroll software. Consider factors like cost, features, and ease of use.
- Gather Information: Collect W-4 forms from employees and determine their filing status, tax allowances, and pay rates.
- Set Up Payroll System: Configure your chosen payroll system with employee information, tax rates, and pay schedules. Ensure it calculates deductions and contributions accurately.
- Calculate Payroll Taxes: This involves federal income tax withholding, Social Security, and Medicare taxes. Your payroll provider can automate these calculations.
- File and Pay Taxes: Regularly deposit withheld payroll taxes to the IRS and relevant state and local agencies. Your payroll provider may handle this for you.
- Distribute Profits: Once payroll taxes and salaries are paid, remaining profits can be distributed to shareholders as S corp distributions. Maintain clear records of these distributions for tax purposes.
Paying Yourself as an S Corp Owner
Unlike sole proprietors, S corp owners are considered employees and must be paid a reasonable salary. This salary serves as the basis for payroll taxes and social security contributions. There’s no set formula for a “reasonable salary,” but factors like industry standards, your experience, and the hours you dedicate to the business play a role.
S Corp Distribution Rules:
- S corp distributions are not subject to payroll taxes.
- Distributions are made proportionally based on share ownership.
- Maintain accurate records of distributions for tax reporting.
By following these steps and addressing common questions, you can navigate S corp payroll with confidence. Remember, consulting with a tax advisor can ensure you comply with all regulations and optimize your tax strategy.
Also Read: Frozen Bank Account by Jenkins Law Firm? Here’s What to Do.
Common S Corp Payroll FAQs
Can I pay myself a low salary and take the rest in distributions?
While tempting, the IRS closely monitors this practice. Ensure your salary reflects fair market value for your role.
How often should I pay myself a salary?
You have flexibility in determining your pay schedule, such as weekly, bi-weekly, or monthly.
Do I need to pay unemployment taxes?
Unemployment tax requirements vary by state. Consult with a tax advisor or your chosen payroll provider for guidance.