S Corp Payroll Guide [2022]

For tax reasons, many businesses choose to be taxed as S Corporations rather than sole proprietorships because of the attractive tax benefits associated with doing so. However, you must be cautious about how you pay yourself in order to remain in good standing with the IRS and take full advantage of the tax savings.

The S Corporation: What Is It?

To simplify tax reporting, certain corporate structures, known as “S corporations” or “S corporations,” are authorized by the Internal Revenue Code to distribute their taxable income, credits, deductions, and losses to its shareholders. That sets it apart from the standard C company in important ways. Instead of forming a limited liability corporation, small firms with 100 or less shareholders can form a S corp (LLC).

Both S corporations and limited liability companies (LLCs) are considered “pass-through businesses” since they are exempt from paying corporate taxes and instead distribute profits to their owners.

Create an S-Corporation Payroll System

Establish Employer Accounts

Establishing the necessary employer accounts is the first order of business when managing payroll for a S Corporation. Here we will take a look at the various employer accounts your S Corporation will require in order to process payroll.

Identification Number (FEIN) Required by the Federal Government: Even while an EIN isn’t necessary by law for a S corporation, having one is a must if you want to do things like open a company bank account, apply for business licenses and permits, or build corporate credit. An EIN can be requested in person, via mail, or through the internet.

Your state tax ID is similar to the FEIN on a federal level. It is a special identifier for your S Corporation that is required by the state for filing taxes. Only if your company will be compelled to pay state taxes will you need to apply for a State Tax ID. Examine the income and employment tax regulations of your state to see if you need this proof of identity.

You must still pay federal unemployment insurance (FUTA) for yourself even if you are the sole shareholder and employee of a S Corporation. Having paid into your own payroll and unemployment insurance in case of a tragedy is a nice perk.

Access to the Internal Revenue Service’s Electronic Federal Tax Payment System (EFTPS): The IRS tax payment facility can be used to settle any outstanding tax obligations. Signing up for this free service is in your best interest as a S Corp owner because you will be required to pay payroll taxes on at least a monthly basis.

The requirement to have workers’ compensation insurance is not universal for S Corp owners. Who is required by law to have workers’ compensation insurance varies by jurisdiction.

There are exemptions for businesses in several states if they have fewer than the minimum required number of workers. Employees who are also stockholders are often exempt from receiving health benefits from their employers. Some jurisdictions recognize employee-owners as workers for payroll purposes but do not mandate that businesses offer coverage to their owners.

Setting up a new hire reporting account with your state is mandatory. Employers in the public, private, government, and nonprofit sectors must comply. Since no company is free from reporting new hiring under the law, your S Corporation will require this sort of account if you want to recruit any employees. This stage might not be necessary if you do not intend to recruit staff.

Get a Payroll System in Place.

Manually calculating, filing, and paying S Corporation income and self-employment taxes is possible, but a specialized payroll provider makes the process much simpler. These payroll systems may cost more each month, but they will make your life much easier.
Numerous offerings are available. If you live in a state that allows for more than one form of payroll service, you can pick from the following:

While basic payroll software can do things like calculate payroll amounts and taxes and create pay stubs, it won’t do anything more complicated like file or pay those taxes on your behalf. To accomplish this, you need to consult the IRS and your state’s tax websites for specifics.

When you choose a full-service payroll company, they will handle everything from calculating payroll and taxes to submitting and paying those taxes and completing year-end payroll forms on your behalf.

Full-service payroll is more expensive, but it takes a lot of stress out of processing payroll at the end of the year and making sure all the paperwork is filed correctly.

After registering for a payroll service, you will need to go through the onboarding steps. Employee names, benefits, FUTA/SUTA tax rates, payroll frequency, and other details must be entered. Make sure you’re filling out the platform’s forms properly by reading the documentation carefully.

Pay yourself a fair wage

In order to comply with IRS regulations, S Corps must pay shareholders a fair salary for their contributions to the company. Expenses are distinct from dividends, distributions, and other forms of remuneration received by shareholders.

To what extent do your personal or the company’s financial circumstances play a role in establishing what you believe to be fair compensation for yourself or other shareholder-employees? Compare your company’s salary to that of similar businesses. You may do a salary comparison by considering:

Geography
Tasks Completed
Market
Size of company

Businesses can use the BLS’s online salary data reports, which break down salaries by region and industry. In addition, you may look up salary information for companies like yours by entering your NAICS code into a database.

You must ensure that employee compensation is commensurate with the value of services rendered to the company. This means that shareholder-employees must be paid taxable salaries that reflect a fair market value for their services.

How to calculate take-home pay?

After settling on the annual salary that your S corp will pay you, the next step is to calculate the amount of tax that will be withheld. Payroll taxes for Social Security and Medicare amount to 7.65% of your wage and will be shared between your S corporation and yourself as an employee. Your employer will contribute $3,825 toward these payroll taxes if your annual income is $50,000, and you will contribute the same amount over the course of the year.

The next step is to calculate your personal federal income tax liability for the year as an employee. Find out how much tax you’ll owe with the help of the IRS’s free Tax Withholding Estimator tool. Your S-corporation will deduct this amount from your salary and remit it to the IRS every three months as your payroll taxes.

Once you know those two figures, you may deduct them from your annual salary and divide the remainder by the number of pay periods in the year.

Report S Corp salary

Salaries are taxable income and must be reported by all employees – in this case, you.

By January 31st of each year, your firm should have prepared a W-2 form detailing all of your compensation for the prior year. For tax purposes, you must include that sum in income on Form 1040.

How frequently should I get paid?

Having determined your salary, you must now decide how often you will be paid. Planning ahead for this is highly recommended. If your firm pays taxes quarterly, you should probably avoid the temptation to pay yourself once a year and save yourself the hassle. Establish the number of times a year that you will be paid. Next, calculate how much you’ll need to withdraw from each paycheck by dividing your entire salary by the total number of paychecks you’ll get.

How do I figure out the payroll taxes for my S corp?

Payroll taxes for Social Security and Medicare will be covered by your S business, lowering your effective tax rate to 7.65%. This cash outlay should be recorded as a contribution toward payroll taxes.

The 7.65% of your income that goes toward Social Security and Medicare payroll taxes will be withheld by your S company and paid on your behalf. In addition, the federal income taxes you owe will be withheld by your S company and sent to the IRS on your behalf. In your records, these two sums should be treated as wages.

Each quarter, you can write one check from your company account to pay the IRS the whole amount owed for payroll taxes. In addition to submitting the check, you will also need to fill out and send in Form 941.

FIVETAX