How To Run Payroll for S-corp: Best Practices, Requirements, and Support

Looking for a way to reduce your self-employment taxes while protecting your personal assets? Structuring your business as an S-corporation may be the answer. This unique business structure offers a tax advantage that allows you to keep more of what you earn by splitting your income between salary and distributions, reducing your self-employment taxes. The business pays owners and working shareholders through the S-corp payroll, and the owner can take the remaining profits as distributions. An S-corp also offers limited liability protection for personal assets.

What Is an S-corp and Why Does Payroll Matter?

The unique advantage of an S-corp is that you pay taxes only once on your business profits, and these profits can flow directly to your personal tax return. This differs from traditional corporations, which get taxed twice—once at the business level and again when owners receive their share of the profits.

In an S-corp, owners who work in the business must receive a regular salary, just like any other employee. IRS rules prevent you from taking all your profits as business distributions to avoid payroll taxes.

If you choose to structure your business as an S-corp, it’s important to set up a proper payroll system to pay yourself, employees, and any shareholders working there. Here's what you need to know.

Best Practices for Running Payroll for an S-corp

Structuring your business as an S-corporation changes how you get paid as the owner. Rather than taking the profits of your business as direct income, you will process payroll for yourself and any shareholders who work with you. You can take the remaining profits as distributions, which aren't subject to self-employment tax. This structure requires careful planning but can offer significant long-term savings compared to a sole proprietorship.

To run payroll for your S-corp, you must obtain a federal employer identification number (EIN), calculate payroll taxes, and file quarterly and annual tax forms. These include Social Security and Medicare contributions and federal and state income tax withholdings.

1. Register for an Employer Identification Number (EIN)

Think of an EIN as your business's Social Security number. It is a unique identifier that you'll use on all your tax forms and payroll documents. Getting an EIN is free and surprisingly simple:

• Apply online: Visit the IRS website to submit your application online. You must complete your application in one session, and you won't be able to save it, so be sure you have everything you need. You usually receive your number immediately to set up your S-corp payroll taxes.
• Apply by fax or mail: If you can't or don't wish to apply online, you can also submit your application by fax or by mail. Fax applications require up to four business days for processing. If you send your application by mail, expect to wait about four weeks.
• International applications: International applicants can call Monday - Friday between 6:00 a.m. and 11:00 p.m. to apply for an EIN over the phone.

2. Establish Federal and State Payroll Accounts

Even if you're just handling S-corp payroll taxes for yourself as a single owner, you'll need to set up federal and state payroll tax accounts, including unemployment taxes, to stay compliant. Most S corporations need to pay both federal and state unemployment taxes:

• Federal unemployment tax (FUTA): If you pay at least $1,500 in wages during a quarter or an employee has been on your payroll for at least 20 weeks in a year, you'll need to pay FUTA taxes. As an owner-employee, you count toward these requirements and can apply for unemployment if something catastrophic happens to your business.
• State unemployment tax (SUTA): You'll also need to register with your state's unemployment agency and possibly other state tax departments. Each state has its own SUTA rules, which may vary significantly from federal requirements. To ensure compliance, contact your state's employment department directly.

3. Determine a Reasonable Salary for S-corp Owners

The IRS requires S-corp owners to establish and pay themselves a reasonable salary, but what does that really mean? Getting your salary right is crucial because paying too little can raise red flags with the IRS and may be viewed as an attempt to avoid payroll taxes.

When determining whether your salary is reasonable, the IRS also looks at what other companies in your industry pay for similar work. A good rule of thumb is to research what others in your field earn in the same role and document why you chose your salary amount.

To meet S-corp payroll requirements for a reasonable owner salary, consider areas like:

• Your training, experience, and education level
• Your day-to-day duties and responsibilities in the company
• Your business size and complexity
• Your overall financial performance
• Relevant legal requirements, such as the Fair Labor Standards Act or state law.
• The current economic conditions in your area
• Your compensation policy for all employees

4. Calculate Payroll Taxes for S-corps

As an S-corp owner, you will pay two main types of payroll taxes on your salary in addition to income tax: FICA taxes (which include Social Security and Medicare) and unemployment taxes. FICA taxes are split between you and your business, with each entity paying half the requirement.

Your business also pays federal unemployment tax (FUTA) at a rate of 6% on the first $7,000 of your wages each year. However, many businesses qualify for a credit that significantly reduces that percentage rate. State unemployment tax rates vary based on your location and business history.

Unlike regular income taxes, which are withheld based on your total earnings, payroll taxes are determined annually and calculated based on your taxable wage base. A reliable payroll system can help you calculate and pay the right amount of taxes at the right time to comply with tax laws.

5. File Quarterly and Annual Payroll Tax Forms

S corporations must file quarterly and annual tax forms throughout the year. These include:

• Form 941: This form reports your S-corp payroll taxes and income taxes quarterly to the IRS. It documents how much you paid in wages and how much was withheld in Social Security and Medicare taxes.
• Form W-2: This form reports your total wages and tax withholdings for the year and must be filed annually.
• Form 1120-S: Use Form 1120-S to report how much money your S-corporation made or lost, along with any tax deductions or credits your business can claim.

Missed deadlines and mistakes when filing these forms can lead to steep penalties. You can minimize those extra costs by using payroll software or working with a payroll service to stay on top of deadlines and ensure compliance.

How Paychex Supports S-corp Payroll Needs

Managing S-corp payroll can be complicated and time-consuming. Paychex relieves that burden with services tailored specifically for S-corps, ensuring smooth payroll operation and tax compliance. Whether you're a single owner or have multiple shareholders and employees, Paychex simplifies payroll management with automated tax filing, compliance support, and streamlined administration.

Simplifying Payroll Management for S-corps

If managing the many details of S-corp payroll sounds overwhelming, you're not alone. Enlisting a professional payroll provider can help you handle complex calculations, tax filings, and compliance requirements. Paychex helps you simplify the process with payroll solutions for shareholders and employees and services tailored to the unique needs of S-corps.

Automated Payroll Tax Filing and Administration

Paychex Taxpay® simplifies S-corp payroll by automatically calculating taxes, making payments, and filing your payroll taxes. With Taxpay, you won't have to worry about figuring out your FICA taxes, unemployment contributions, or income tax withholdings. You can easily keep track of important deadlines for your quarterly 941 forms, annual W-2s, and state tax filings in the system, ensuring compliance and avoiding costly IRS penalties.

Managing Payroll for Shareholders and Employees

Just like S-corp owners, shareholders who work for the business must receive a regular salary that aligns with industry norms. Paychex helps you document shareholder responsibilities and maintain reasonable compensation levels that satisfy IRS requirements while managing standard payroll for your other employees.

Employee Self-Service for Payroll Tasks

Paychex's employee self-service tools make it easy for employees to access payroll information online. Our secure online portal lets team members view their pay stubs, access their W-2s, update their personal information, and adjust their tax withholding in one place. The self-service option saves time for S-corp owners and HR personnel who manage S-corp payroll taxes and keeps employee information accurate.

Ensuring Tax Compliance and Savings for S-corps

S corporations offer owners tax advantages but must also meet specific IRS requirements. Paychex provides expert service and support to ensure you meet all IRS compliance requirements and benefit from the unique tax advantages of the S-corp structure.

S-corp-Specific Tax Advantages

As an S-corp, you have access to unique tax advantages, including the following benefits:

• Your payroll taxes are automatically withheld from your paycheck, so they are easier to manage
• Your salary payments count as a business expense, which helps lower your company's taxable income
• You only pay FICA taxes on your salary, not on your profit distributions, which could mean substantial tax savings over time

To benefit from these advantages, you must carefully balance your salary and distributions to meet IRS requirements. Paychex helps you structure your S-corp payroll taxes to satisfy the IRS's reasonable compensation rules while taking advantage of legitimate tax savings.

Ongoing Compliance Support

Stay ahead of evolving tax laws and regulations with ongoing compliance support and timely updates about new payroll rules that affect your S corporation. Paychex monitors federal, state, and local tax law changes, alerting you when these updates affect your payroll obligations. We help you avoid costly penalties by aligning payroll practices with current regulations, maintaining proper documentation of reasonable compensation, and meeting all filing deadlines.

Managing Quarterly and Year-End Tax Filings for S-corps

Streamline quarterly and year-end tax filings, ensure that your business meets every deadline, and submit forms on time, every time. Paychex handles all your tax calculations and filings throughout the year, from quarterly 941s to annual W-2s and state tax reports.

Calculating Payroll and Taxes for S-corps

Whether you're processing payments for shareholders who work in the business or for your other employees, accuracy is essential for S-corp payroll. Paychex's comprehensive payroll services help you calculate Social Security, Medicare, federal and state unemployment taxes, and income tax withholdings correctly and on time. We put your mind at ease, ensuring that you take the correct deductions, maintain proper documentation of shareholder compensation, calculate the correct tax withholdings for each type of payment, and keep detailed records demonstrating compliance with IRS guidelines.

Filing Federal Quarterly Payroll Taxes

Staying current on quarterly tax filing is critical; even simple mistakes can lead to compliance issues. Let us take the stress out of federal quarterly payroll tax filings and ensure accurate reporting of income taxes and payroll taxes, including IRS Form 941.

Our system tracks all your payroll data throughout the quarter, including any special payments or adjustments, and ensures that Form 941 matches your payroll records. We also maintain detailed records so you can provide accurate tax payment reports to employees and the Social Security Administration. When each quarter ends, you can be confident that your S-corp payroll tax obligations are always handled correctly and on time.

Annual Tax Documents for S-corps

Avoid the last-minute scramble of tax season with precise year-end payroll management and reporting to maintain tax compliance. Paychex simplifies this process by assisting you with preparing and filing your annual tax documents, including W-2s for all employees. We help you meet all filing deadlines, provide electronic copies of W-2s to your employees through our secure portal, and maintain the detailed payroll records you need for your annual tax return.

Advanced Payroll Features for S-corps

S-corporation payroll includes more than just processing paychecks. You must also monitor trends, analyze data for decision-making, and scale your payroll processes as your business grows. Paychex payroll tax solutions deliver advanced reporting tools and scalability so you can make smarter decisions about compensation, hiring, and business expansion.

Robust Reporting and Analytics

Managing S-corp payroll requires careful tracking of both salary and distributions. Paychex's reporting tools make it easy to manage all the details and ensure compliance with IRS rules on reasonable compensation. Our analytics dashboard helps you monitor the key payroll and HR data you need to spot trends and make informed decisions. You can also quickly generate reports showing payroll history, tax withholdings, and distribution patterns to support compensation decisions during tax time or in case of an audit.

Scalable Payroll Solutions for Growing S-corps

As your business grows, your payroll needs become more complex. Paychex's scalable solutions grow alongside you, quickly adapting when you add new employees, open new locations, or expand your benefits packages. Our services adapt to your changing needs, helping ensure smooth operations no matter how large your team becomes.

Easy Transition to Paychex for S-corps

Ready to simplify your S-corp payroll taxes with Paychex? We make the transition easy with expert guidance through every stage, from seamless onboarding and data transfer during setup to ongoing support from a dedicated specialist. Discover the solution to better payroll management to save valuable time, avoid pitfalls, and grow your business confidently.

Seamless Onboarding and Data Transfer

Switching your S-corp payroll processes to a new provider may seem daunting, but Paychex handles most of the heavy lifting for you. Starting with essential information like your federal ID number and employee details, our team creates your account and transfers your historical payroll data directly from your previous system.

An implementation specialist provides personalized support throughout the onboarding process, including account setup. We will even process your first few payrolls for you, ensuring a smooth changeover that doesn't affect your current payroll.

Dedicated Support

Both during and after onboarding, you'll have a designated payroll specialist who understands your business's specific needs. This go-to contact will get to know your business and help you prevent common payroll mistakes.

Whether you're processing regular payroll, handling year-end tasks, or dealing with a unique situation, you can reach out directly by phone, email, or through the online platform for support.

Simplify Your S-corp Payroll With Paychex

Paychex provides powerful tools and support to simplify your S-corp payroll and save you hours of manual work each month. Our payroll services are tailored to the unique needs of S-corporations, including automated features that help you keep your tax payments on schedule, file paperwork accurately, maintain detailed records, and verify that you have met all IRS requirements. Paychex can help you simplify and streamline the entire process.

The result? Less time wrestling with tax compliance paperwork and more time focused on what you do best.