How to Run Payroll in an S Corp: What Employers & Payroll Professionals Need to Know

Set in the operating agreement, guaranteed payments are made even when profits are low or negative. This is a key area where full-service payroll and tax advisory from 1-800Accountant can make an impact, offering significant value in maintaining compliance while optimizing tax savings. By default, the IRS treats a single-member LLC as a “disregarded entity,” meaning it’s taxed like you’re a sole proprietor and still assets = liabilities + equity offers liability protection.

Do S corp owners need to be on payroll?

The form is due by the 15th day of the third month after the end of its fiscal year—generally, March 15 for companies that follow a calendar year. Easier to establish than S corps, LLCs typically are formed by sole proprietors or small groups of professionals, like attorneys, doctors, or accountants. However, their financing options are more limited—generally, to bank loans, as opposed to equity investors—which can limit their potential for growth. Partnerships, corporations, and nonresident aliens cannot qualify as eligible shareholders. Following the steps outlined in this post will give you the basic roadmap you need to run your S Corp payroll effectively. But there are missteps and mishaps you may still run into that can derail your payroll processing and cause you to run up against penalties, fines, or worse.

U.S. Income Tax Return for an S Corporation

This differs from traditional corporations, which get taxed twice—once at the business level and again when owners receive their share of the profits. S corporation owners who perform more than just minor work for the business typically need to be on the payroll because they must pay themselves a reasonable salary. Owners who take a salary that’s below market value for the services they perform or claim all of Catch Up Bookkeeping their income through shareholder distributions may be audited and penalized by the IRS. If the IRS concludes that an S corporation owner did not receive a reasonable salary after weighing these considerations, it can reclassify distributions received as salary. This means the owner would have to pay back payroll taxes on that income and any penalties the IRS imposes. One of the biggest advantages of being an S Corporation is the tax savings from taking distributions that are not subject to payroll taxes.

Need help with your business accounting?

• By letting a payroll provider handle these tasks, you can concentrate on what you do best.
• Designed only for the smallest employers, whose liability for these taxes is one thousand dollars or less.
• Writing policies and procedures for timekeeping, pay schedules, and overtime calculations is good practice to ensure everything is done right.
• Understanding S Corp payroll is crucial for guaranteeing compliance with IRS guidelines and avoiding potential financial penalties.
• Your corporation pays a 7.65% Social Security and Medicare payroll tax.

An S corp structure also helps in reducing other taxes, such as self-employment tax. Note that S corp structures come with additional rules and paperwork that must be followed to comply with IRS regulations. The main difference between an S corp and a C corp is how each is taxed.

IRS Guidelines Compliance

These apply to any eCommerce or Online Business owner, no matter how they are set up. Along with deciding how much to pay yourself, s corp payroll you also have to have a payroll system put in place. But when it comes to implementing payroll, we recommend the same solution for pretty much everyone.