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S Corporation owner-employees must adhere to specified criteria regarding compensation for health insurance premiums and salaries. It is where a qualified payroll service provider can help. Whether you’re running your own business or have an S Corp that employs you, you need to follow reasonable compensation guidelines set by the IRS and find a balance between salary and distributions that maximize tax benefits.
Know the Rules
S-Corps are a popular choice for business structures because of the tax benefits they provide. To capitalize on these benefits, making and managing payroll taxes is essential. About pay for shareholders and employees, this is especially true. The IRS requires S-Corp shareholders who conduct substantial work for their companies to pay themselves a reasonable salary, separate from distributions or dividends. To determine a fair wage, you can leverage third-party research to see what others in your industry earn. The Bureau of Labor Statistics website is an excellent place to start.
Once you’ve hammered out your reasonable salary, you must ensure it gets paid. Set up your company with the correct federal and state payroll taxes, including employee and employer matching contributions for Social Security and Medicare. If you don’t do this, your company may incur penalties for failing to make timely payments. Running payroll for S corp can feel like a daunting task, but there are ways to solve this. Partnering with a payroll provider is the best way to avoid missteps and errors.
Set Up Your Payroll System
As an S-Corp, you must decide how you’ll pay yourself. You may pay yourself either as an employee wage or as a share of company profits, depending on the form of your organization. Regardless, the IRS requires you to collect and report payroll taxes. It includes paying quarterly estimated taxes using Form 1040-ES and preparing, filing, and depositing a W-2 for each shareholder-employee. Additionally, you’ll need to open a bank account for payroll transactions (different from your firm general accounts), register for the Electronic Federal Tax Payment System, and get workers’ compensation insurance if required by law in your state.
A qualified payroll provider can simplify your operations. They’ll help you select a payroll schedule, calculate employee hourly wages and overtime, determine deductions, prepare net pay, and issue checks. They’ll also maintain records of payroll-related activities and ensure that you’re meeting all payroll tax deadlines and completing the necessary federal, state, and local paperwork.
An S-Corp owner can reduce personal tax liability by redirecting health insurance deductions to the company rather than the individual. Additionally, they can avoid FICA taxes by separating the salary paid to the corporation from the total company profits reported on a tax return. A knowledgeable payroll service provider can advise on these and other tax-saving strategies.
Pay Your Employees
Whether you’re a Business-of-One or have a handful of employees, S corp payroll must be managed accurately, timely, and responsibly. A system that can be adjusted for your particular circumstances, including the number of employee shareholders, is essential. This way, you can keep your company’s expenses within tax guidelines while allowing shareholder-employees to receive the paycheck they deserve. It’s important to remember that the IRS deems what is “reasonable compensation” for your role in your business. So, even if you pay yourself less than others in your industry, the IRS may still recharacterize your distributions as wages — meaning you’ll have to fork over payroll taxes.
For this reason, hiring a qualified payroll service provider is best to ensure that W-4 forms, managing withholdings, and making federal and state payroll tax deposits are handled correctly. A reputable payroll service provider can also help you align with local and state payroll tax requirements, significantly reducing your tax liability. If you’re prepared to launch a new S corp payroll solution, consider using solutions for your one- or two-person business. They’ve helped countless small businesses with their payroll, and some system is simple and easy to use.
Pay Yourself
Whether you’re a one-employee/shareholder in S Corp or a more significant business with multiple employees, it’s essential to understand the rules around paying yourself. If you don’t, the IRS could suspect your company is avoiding payroll taxes. Severe penalties and even tax audits might result from it. Generally, the IRS requires S Corp owners who conduct substantial work for their businesses to pay themselves reasonable compensation, separate from dividends and distributions. While the IRS’s definition of “reasonable salary” is vague, third-party research and comparison with other businesses in your industry can help you set a fair salary. The Bureau of Labor Statistics website provides wage data by occupation and region. It’s crucial to understand that your firm must pay federal income, unemployment, and FICA taxes regardless of how you reimburse yourself. You must file a state tax ID form (or something similar) and pay state payroll taxes if your company is an S corporation.
