Does managing your S Corp payroll feel like juggling flaming torches while riding a unicycle? You need laser focus and precise timing; if you miss a beat, things could go up in flames!
As an S Corp owner, maintaining tax compliance is essential. You could be liable for fines and penalties if you miss a deadline, file the wrong forms, or make mistakes. But that won’t happen to your business because you’ll be on top of payroll and ready to focus your attention elsewhere.
This article will show you how to navigate S Corp payroll requirements and manage payroll without setting your business on fire.
S Corp Payroll Requirements: The Lay of the Land
Setting your business up as an S Corp has its plusses.
S Corporations have several advantages, like pass-through taxation that avoids double taxation, self-employment tax savings, and limited liability protection for shareholders. Additionally, the S Corp designation enables a perpetual existence, making it easier to transfer ownership.
A clear management structure with a board of directors and officers ensures proper roles and responsibilities for shareholders. Additionally, S Corps can attract external funding by issuing stock, helping their business grow.
That’s not to say there aren’t any drawbacks. You’ll have stricter operational processes, such as regular shareholder meetings. Only U.S. citizens or resident aliens can be shareholders. And finally, payroll is more complex.
Which is where ConnectPay comes in. We simplify payroll processes for many S Corp owners to help them comply with federal and state tax withholding, unemployment taxes, worker's compensation insurance, and reporting requirements and forms, which can be time-consuming and complicated.
Understanding S Corp Payroll
Shareholders in an S Corp who are active in the daily operations of your business are considered employees. Their compensation must be processed through payroll. If shareholders aren’t actively involved in day-to-day operations, they can still receive profit distributions, which are not subject to payroll taxes.
The IRS requires that S Corp owners get paid a reasonable salary for their services. This requirement prevents people from avoiding self-employment taxes by distributing all income as profit distributions, which aren't subject to payroll taxes.
If you don't follow this requirement, you can get penalties, back taxes, and possibly have your distributions reclassified as wages.
The salary portion of an owner's compensation is only subject to self-employment taxes (Social Security and Medicare), not profits. Compared to other business structures, like sole proprietorships or LLCs, where all income is subject to self-employment taxes, you can save a lot of money.
To sum up:
- S Corps have unique tax advantages due to their pass-through taxation and self-employment tax savings, which impact payroll.
- S corporations' owners are employees and shareholders, and they get a salary and profits.
- Owners of S Corps have to follow strict IRS rules about reasonable compensation. Sole proprietorships and LLCs have simpler compensation structures.
Essential S Corp Payroll Requirements
1. Set up Employer Accounts
You must set up the following employer accounts to run payroll for your S Corp.
A Federal Employer Identification Number (FEIN) is not legally required for an S Corp. Still, you'll need one to open a bank account, get a permit, or establish credit in your organization's name. You can get an EIN in person, by mail, or online.
Your State Tax ID is your FEIN at the state level. It's used to file state taxes for your S Corp. If you must pay state taxes, you'll need a State Tax ID. Check your state's rules about income and employment taxes to see if you need it.
You’ll need a New Hire Reporting Account to report new hires to the state. Every employer, public or private, government or not-for-profit, has to do it.
2. Pay Yourself a Reasonable Salary
Your salary should reflect your contribution to your business. Ask yourself the following questions:
- Does my 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?
The trick is to avoid underpaying or overpaying yourself. Both have consequences for you, the owner. You must assess your business' revenue, profits, and financial stability before determining your salary. You don’t want to strain your cash flow.
Set up a payment schedule, and regularly review your salary to ensure it remains reasonable. Adjust your salary as needed based on changes in your role, business growth, and market conditions.
3. Calculate Payroll Taxes
You must consider various payroll taxes as an S Corp owner.
Federal and State Tax Withholding
- You must withhold and contribute the employee and employer portions of FICA Taxes (Social Security and Medicare).
- Withhold federal income tax from employees' wages based on the information provided in Form W-4.
- Withhold state income tax from employee wages and comply with specific state regulations and rates.
Federal and State Unemployment Tax Act
- You must pay federal unemployment insurance (FUTA). In case of disaster, you can apply for unemployment against the payroll and unemployment insurance.
- SUTA is the same thing but at the state level. Rates and wage base limits vary by state. New employers are sometimes assigned a standard rate, while established employers may have experience-based rates.
- Depending on your state's regulations, S corporations may be required to provide workers' compensation insurance.
- In work-related injuries or illnesses, this insurance covers medical expenses and lost wages.
- Factors such as your industry, payroll size, and past claim history affect workers' compensation insurance premiums.
The best way to pay your payroll taxes is quarterly. To avoid missing payroll tax deadlines or accidentally miscalculating your tax amounts, partner with a payroll provider who can connect you with local tax experts.
4. File State and Federal Taxes
Here are the tax forms you’ll need to file quarterly and annually.
Reports income taxes, social security, and Medicare.
State Unemployment (SUTA)
You must file your state unemployment tax payments every quarter.
This form is used to file your state income tax.
Reports your annual Federal Unemployment Tax (FUTA).
Enables you to file taxes for social security, Medicare, and federal income tax only once per year instead of quarterly. Designed only for the smallest employers, whose liability for these taxes is one thousand dollars or less.
Wage and Tax Statement that reports an employee’s total income and taxes withheld from wages.
Transmittal of Wage and Tax Statements summarizing an employee’s W-2 for the Social Security Administration.
U.S. Income Tax Return for an S Corporation. This form reports the business’ income, gains, losses, deductions, and tax credits.
Schedule K-1 (Form 1120-S)
Shareholder’s Share of Income, Deductions, Credits, and more. This form reports an individual shareholder’s income, deductions, and tax credits.
Best Practices for S Corp Payroll Management
To ensure payroll is processed correctly, you must keep up-to-date employee information records, such as contact details, job titles, pay rates, and withholding allowances. You’ll want to have open lines of communication, too. Make sure your employees understand the payroll process and their rights.
Writing policies and procedures for timekeeping, pay schedules, and overtime calculations is good practice to ensure everything is done right. Your employees rely on you to run payroll professionally and efficiently.
Do all you can to maintain compliance with federal, state, and local payroll tax laws and regulations. Lastly, ensure accuracy and compliance by performing regular payroll audits to identify errors or discrepancies.
Pro tip: There's an earlier tax deadline for S Corps – around March 18. Working with a payroll provider like ConnectPay can help you stay on track of key deadlines.
S Corp Payroll Requirements: No More Surprises
Effective payroll management is crucial to your S Corp’s success. You must ensure you meet all legal and tax requirements, and by properly managing payroll, you’ll avoid penalties, maintain a positive reputation, and benefit from tax advantages.
At ConnectPay, we manage and simplify payroll for thousands of small businesses, including S Corps. Instead of managing payroll yourself, we will:
- Connect you with local tax experts to help you navigate payroll regulations and ensure compliance, reducing the risk of penalties and audits.
- Help you save time with automated tax filing, allowing you to focus on running your business instead of managing payroll.
- Always answer the phone within business hours so you’re never caught short.
We also offer pay-as-you-go workers’ comp, simplified reporting, digital pay stubs, and so much more. Reach out today for a FREE Payroll and Tax Compliance Review. We’ll pinpoint where you can save time, money, and stress in your payroll.