Wading into the world of self-employment can oftentimes feel like walking blindfolded through a dark room. You know where you want to go, but the path of how to get there is murky at best.
You’ve heard about the benefits of getting paid as an S Corporation rather than a self-employed individual, but there’s one significant problem associated with making that change: you don’t know how to run payroll for S Corp.
If your head is spinning with thoughts of endless calculations and tax audits and penalties just thinking about it, you’re not alone. But it doesn't have to be so intimidating.
We’re here to provide you with five expert tips that can serve as your step-by-step guide to running payroll for your S Corporation.
How To Run Payroll for S Corp
Before we cover our top tips for running payroll for an S Corp, let’s first talk a bit about S Corporations in general. What is an S Corporation? Who can form one? And what are the benefits of operating as one?
An S Corp is a business structure that is able to pass income, losses, and deductions to shareholders for the purpose of federal tax benefits. According to the IRS, you can form an S Corp if you meet the following requirements:
- Operate out of the United States
- Have shareholders who are individuals, trusts, or estates (not partnerships or other corporations)
- Have no more than 100 shareholders
- Have only one (1) class of stock
Certain financial institutions, insurance companies, and sales corporations also do not apply. Many people choose to turn their single-member LLC into a single-owner S Corp in order to avoid double taxation in terms of self-employment taxes.
Other benefits you can enjoy when you run payroll through an S Corp include protecting your personal assets from business losses and receiving dividend payments, which are not subject to self-employment taxes.
ConnectPay currently supports over 500 S Corp owners throughout the country. We have specific programs designed to support S Corp payroll. If you’re curious about the ways ConnectPay can help you manage your S Corp payroll smoothly and simply, get in touch with one of our Connected Service Reps today!
1. Set Up Employer Accounts
Our first tip for running payroll for your S Corp is to start out by setting up the appropriate employer accounts. Let’s take a look at some of the employer accounts you will need to have in order to run payroll for your S Corp.
Federal Employer Identification Number (FEIN): Technically, you are not legally required to have an EIN as an S Corp, but you’ll need one if you want to open a bank account in your business’s name, apply for local or regional permits, or establish credit in your business’s name. You can apply for an EIN in person, by mail, or online.
State Tax ID: Your state tax ID is the state-level version of the FEIN. It is a unique number used to file state taxes for your S Corp. You will only need a State Tax ID if your business will be required to pay state taxes. Research your state’s laws concerning income and employment taxes to determine whether you need this ID.
Unemployment Insurance: Even if you are a single-owner S Corp employee, you need to pay federal unemployment insurance (FUTA) for yourself. The benefit here is that, in the case of disaster, you can apply for unemployment against the payroll and unemployment insurance you paid on your own behalf.
Electronic Federal Tax Payment System (EFTPS) Account: You can use this tax payment service to pay taxes due to the IRS. Since, as an S Corp owner, you’ll be paying payroll taxes on at least a monthly basis, it will be beneficial to sign up for this free service.
Workers’ Compensation: Not every S Corp owner will need to pay workers’ compensation insurance. Laws establishing who must carry workers' compensation insurance vary from state to state.
In some states, if your business has fewer than a specified number of employees you’ll be exempt. Businesses generally won’t need to provide coverage for workers who are also shareholders. Some states include employee-owners when counting the number of employees but do not require the company to provide coverage to the owner.
Review your state’s requirements to determine whether or not you need workers’ compensation insurance.
New Hire Reporting Account: You will need to register a new hire reporting account with your state. All private, public, government, and not-for-profit employers are required to do so.
The law does not exempt any business from reporting new hires, so if you plan to have any employees working for your S Corporation, you will need to use this type of account to report on those hires. If you do not plan to hire employees, this step may not apply to you.
2. Determine a Reasonable Salary
When you’re operating as an S Corp, you will receive a salary from the corporation. This means you will be required to determine a reasonable salary for the job duties you’re performing for your S Corporation.
You can easily determine an appropriate salary for yourself based on the IRS factors relating to S Corp salaries:
- Does your position require training?
- How much time and effort is required for this position?
- How much experience is typically required for this or similar positions?
- What are the going salaries for this or similar positions?
- Does this position receive any non-salary bonus payments?
If you answer these questions, you should be able to avoid overpaying or underpaying yourself—both of which have consequences for you as the owner. When you underpay yourself, you can get into audit trouble, especially if you have elected to pay yourself $0 annually. On the flip side, if you overpay yourself, you’ll end up paying more than you need to in self-employment taxes.
You will also want to set up your payment schedule here. Will you receive a paycheck quarterly, annually, weekly, or on some other schedule? Note that this salary is separate from any distributions, dividends, or other compensation you might receive from your S Corporation.
3. Calculate Payroll Taxes
Once you have set your reasonable salary, you will use this figure to determine the following taxes:
- FICA Taxes
- Income Taxes
- State and Federal
- Unemployment Taxes
S Corporations do not have a specific tax rate because all of your S Corp’s income is pass-through income that comes through on the owner’s—your—personal tax return. Your tax rates will be subject to all taxes based on your tax bracket and filing status.
You will file your payroll taxes using Form 941 for income and FICA taxes and the portion of payroll taxes your S Corporation paid in that period. Form 1040-ES will report your estimated taxes on income that isn’t subject to withholding.
It’s recommended that you prepare to pay your payroll taxes on a quarterly basis. The best way to avoid missing payroll tax deadlines or accidentally miscalculating your tax amounts is to partner with a payroll provider who can help you.
ConnectPay can provide you with local tax experts and connections that can help you run your S Corp payroll processes like a well-oiled machine.
4. Record Payroll Transactions
Our fourth tip for how to run payroll for an S Corp is to maintain accurate and detailed records for all payroll transactions. It can be easy to get passive with your record-keeping, especially if you are a single-owner S Corp simply using your corporation to pay yourself.
However, getting lax on your record-keeping will certainly come back to bite you in the event of a tax audit.
To record your payroll transactions effectively, you will want to split your transactions into three categories:
- Wages: The regular salary you pay yourself and any employees you have working for your S Corporation. You will also include income tax in this section.
- Payroll Taxes: Any taxes you pay on social security, Medicare, and unemployment.
- Shareholder Distributions: Any dividends you receive from your S Corporation that are taxed at the shareholder level instead of being included with your regular wages.
5. File State and Federal Taxes
We briefly discussed taxes earlier in this post, but in this section, we wanted to break down your taxes clearly. Let’s discuss the tax forms you will need to file on a Quarterly versus an Annual basis.
Related: What is 941 Schedule B?
Quarterly Tax Forms:
- Form 941: Reports income taxes, social security, and Medicare. Any business that pays wages needs to file this quarterly form unless you’re approved to file a Form 944 (listed below) annually instead.
- State Unemployment: Also known as SUTA, you will be required to file your state unemployment tax payments every quarter.
- State Income: This form is used to file your state income tax. Your S Corp will be required to file this form each quarter.
Annual Tax Forms:
- Form 940: Reports your annual Federal Unemployment Tax (FUTA). Every business with employees (including self-employed S Corp owners) must file this form each year.
- Form 944: Enables you to file taxes for social security, Medicare, and federal income tax only once per year instead of quarterly. This is designed only for the smallest employers, whose liability for these taxes is one thousand dollars or less.
- Form W-2: Wage and Tax Statement that reports an employee’s total income and taxes withheld from wages.
- Form W-3: Transmittal of Wage and Tax Statements that summarizes an employee’s W-2 for the Social Security administration
- Form 1120-S: U.S. Income Tax Return for an S Corporation. This form reports the business’ income, gain, losses, deductions and tax credits.
- Schedule K-1 (Form 1120-S): Shareholder’s Share of Income, Deductions, Credits, etc. This form reports an individual shareholder’s income, deductions, and tax credits.
Learning How To Run Payroll for S Corp
Running payroll for an S Corp can feel overwhelming, especially if you’ve never had to run payroll for a small business before.
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.
To avoid making these missteps, you may want to partner with a payroll provider that can handle your payroll on your behalf.
Get in touch with a ConnectPay Connected Service Representative today to see how we can help you manage your S Corp payroll with ease.