We won’t bother you with the basics of reasonable compensation and jump directly to the subject of S Corp payroll.
Key Things to Know Before You Start S Corp Payroll
- It’s Similar to Paying Employees, But with Some Tax-Savvy Benefits
While processing payroll for yourself as an S Corp owner is much like paying regular employees, there are some accounting strategies that can make things more efficient and tax-friendly. You don't have to employ them, but if you do, we’ll cover those later in this blog. So, keep on reading! - W-2 Deductions and Income
Your S Corp payroll will result in a final W-2 form, which will be deducted as an expense on your S Corp’s tax return, and it will show up as wages income on your personal return. Tax-wise, it’s a wash—except for payroll taxes, which you’ll pay through your W-2. The key reason you pay yourself through a W-2 is to pay payroll taxes that the IRS wants. - Payroll Forms You Need to Know
Besides a W-2, which is issued in January of the following year, there are also four 941 forms. You can think of these forms as some sort of progress forms, and the summary of wages on all forms should reflect what is shown on your final W-2. These forms should be issued throughout the year at certain due dates. Yes, throughout the year and not all at once whenever it's comfortable for you. What if you do them all at once, you ask? Well, unless these forms show zero income, you will get payroll penalties for filing late, and those are huge. In many cases these penalties can be more than the tax savings from having an S Corp.
What Information Do You Need to Run S Corp Payroll?
Before you process payroll, gather the following info:
- EIN (Employer Identification Number)
This is the number you got when you registered your S Corp. - Your Social Security Number and Address
You know this one—hopefully! - State ID for Your S Corp
If you live in a state with income taxes, you’ll need this ID. Getting it can take time, so don’t wait until the last minute to request it. Missing the deadline could lead to delays in issuing your payroll forms and, as we mentioned, payroll penalties can be significant.
Once you have all the required info, it’s time to decide how to run payroll. Let’s look at your options:
How to Process Payroll for an S Corp
- Do-It-Yourself (Not Recommended)
While it's possible to do payroll manually on paper and it is definitely the cheapest option, we strongly advise against it. Payroll taxes are complex, and each state has its own ever-changing rules. Keeping up with all the tax nuances takes a lot of time and effort—and mistakes could lead to steep fines and audits. This option is risky and time-consuming. - Hire a Bookkeeper or CPA
A bookkeeper or CPA will take the burden off your shoulders. However, in most cases, they will outsource the actual payroll processing to a payroll company. Contrary to common belief, CPAs don't do payroll ourselves! Is it always bad? No. Because while coordinating payroll, accountants can also do some basic tax planning, about which we will talk later. - Work with a Payroll Company Directly
If you prefer to manage payroll yourself, you can work directly with a payroll company. There are many options available online, and some are promoted by social media influencers. Do your research and choose the one that best fits your needs. Some companies offer great customer service with a representative you can speak to, while others offer strong online tools for you to manage everything on your own. With a payroll service, you'll avoid the risk of mistakes, and they’ll take care of filing all necessary reports and forms for you. However, you may struggle with the tax planning aspect.
Tax Hacks for S Corp Payroll
And now let's go tax strategies I promised earlier.
Please note, you can’t employ them onto your employees (if you have them), since you have a responsibility to pay employees on time for the work performed and for filing their payroll forms on their behalf. But if you are a single S Corp owner, these tax hacks are available to you. The payroll software will handle tax compliance and you will pay your share of payroll taxes. But the timing and withholding could be different from what you will see in the standard payroll process.
So, what are the tax hacks you can employ?
- Use W-2 to Pay All of Your Your Federal and State Taxes Payment of federal and state income taxes through S Corp W-2 (instead of separate estimated payments by check or website) is more efficient. Paying quarterly estimated taxes is “clunky”. Besides, the IRS knows the dates you make those estimated payments, and if you’re late, penalties for late payment will apply. With S Corp payroll, you can spread out your taxes over the year instead of making estimated payments. And if tax planning is done correctly, you won’t owe extra at tax season or incur estimated tax penalties. The CPA can calculate your estimated tax liability for the year and pay your quarterly estimated taxes through payroll withholdings—no more writing checks, using online portals, or tracking due dates. We do this by adjusting your federal and state withholdings to reflect your W-2 and K-1 income, plus other income sources. Technically, we’re not paying estimated taxes, but sending money to the taxing agencies via payroll. You can read more about this tax strategy here.
- One Big Payroll Payment at Year-End
If cash flow is tight and you don’t want to pay yourself regularly throughout the year, you can file zero 941 forms we mentioned before (the payroll progress reports) for the first three quarters. Since those forms dont show any income, they also won't have any payroll taxes associated with them. Then, in December, you can pay yourself a large salary for the whole year and file a fourth-quarter 941 form that shows that amount. This approach gives you the flexibility to manage your cash flow, while still making sure your payroll forms are filed on time. With the help of a CPA, you can calculate your exact tax liability and ensure you don’t underpay in taxes or trigger estimated tax penalties. - After the Fact Payroll
Some shareholders prefer taking distributions from their S Corp instead of doing regular payroll. In our experience these are usually less organized clients or clients with unstable cash flow who sometimes don't have funds to pay yourself. If you’re in this situation, a CPA can help you "reclassify" some of those distributions as salary and issue payroll forms for the salary amount so that you can pay the tax. This way, you’ll pay self-employment taxes on the salary portion, but avoid paying tax on the rest of withdrawals. This approach involves working with a CPA, as it requires filing payroll forms after the fact.
What If Your Business Can’t Afford Salaries?
If your business is struggling and can’t afford to pay salaries, it’s not necessarily required to do so. The IRS requires to pay yourself a salary only when a) the year was profitable. b) if you also withdrew money from your S Corp bank account. You can read more about these rules here.
Final Thoughts:
Running payroll for your S Corp doesn’t have to be a headache. Whether you do hire a bookkeeper or CPA, or work with a payroll company, the key is to stay on top of your paperwork and deadlines to avoid costly penalties. And don’t forget to take advantage of tax strategies that can save you money!
And if you ever need help, please check out our services here: