How to Do Payroll for Single Member S Corp

 

Once you’ve gone through the process of making your business an S corp, you are likely wondering how you get paid.

You are, after all, your best employee, so let’s make sure you get this right. In this article, I will discuss the before, during, and after of how to do payroll for a single member S corporation.

Should my business become an S corporation?

First of all, if you’re still deciding whether or not to turn your business into an S corp, or if you have questions about why you would want to do that, we have a complete guide to S corp advantages and disadvantages. Make sure you read through that information and take our free quiz to see if your company is eligible for this election.

How much should I pay myself?

Once you’ve officially become an S corporation, you’ll first need to decide upon a reasonable salary to pay yourself. There are lots of factors that must go into this decision process. Some of these factors include your qualifications, the size and complexity of your business, and the average rates of compensation others earn in similar positions with similar companies. I recommend completing the S-Corporation Reasonable Compensation Report to find the best salary for you.

How often should I get paid?

Now that you know how much you’ll get paid, there is something else to consider: How often will you pay yourself? It is wise to set up a schedule for this. Although you might think it would be easier to only pay yourself once per year, that isn’t the best choice, especially if your business is paying quarterly taxes. Figure out how many times per year you’ll be paid. Now just take your total salary and divide that by the number of paychecks you’ll be earning in order to get the amount needed per paycheck.

How do I calculate my net pay?

Once you’ve hammered out the salary your S corp will pay you for the year, it’s time to figure out how much of that salary will go to Uncle Sam. Your S corp and you as an employee will each pay 7.65% of your salary in taxes for Social Security and Medicare payroll taxes. For example, if your salary is $50,000, then your company will pay $3,825 for these payroll taxes, and you will also pay $3,825 to those same tax categories over the course of the year.

Next, you need to determine how much you, as an employee, will owe for your federal income taxes. The IRS has a free Tax Withholding Estimator on their website that you can use to determine how much you will owe. This is the amount that your S corporation will withhold from your employee paycheck and instead pay to the IRS in quarterly taxes on your behalf.

Once you have those two numbers figured out, you’ll subtract those amounts from your total salary and then divide that salary by how many paychecks you will give yourself per year. Here’s how that would look for a salary of $50,000:

Payroll Breakdown
Reasonable Compensation$50,000
Social Security and Medicare Taxes($3,825)
Estimated Federal Income Taxes($6,000)
Net Annual Salary$40,175
Paychecks Per Year÷24
Net Wages Per Paycheck$1,673.95

How do I calculate my S corp’s payroll taxes?

Your S corporation will pay 7.65% of your salary in taxes for Social Security and Medicare payroll taxes. You should categorize this payment as payroll taxes in your books.

Your S corporation will withhold and then remit payment on your behalf for another 7.65% of your salary in taxes for Social Security and Medicare payroll taxes. Additionally, your S corporation will withhold and then remit to the IRS your federal income taxes on your behalf. These two payments should be categorized as wages in your books.

The total for all of these payroll taxes can be sent to the IRS quarterly in one check from your business account. Along with the check, you will fill out and submit Form 941.

How do I pay myself?

You’re on a roll now, so let’s go through how you can get your moolah from your company to your personal bank account. Luckily, this step is very easy. All you need to do is either write a check or set up a bank transfer from your company’s business account to your personal banking account in the amount you’ve determined you’ll earn per pay. Make sure you categorize these payments as wages in your books.

Keep in mind that if you disburse money to yourself for shareholder distributions at other times throughout the year, you will categorize those payments as shareholder distributions rather than wages.

What other tax-related paperwork do I need to do?

As both an S corporation owner and employee, there are several pieces of paperwork that you will need to file with the IRS.

  • Your corporation must send a Form W-2 to the IRS every year to report your salary.
    Your corporation must send you a Form W-2 by January 31 of each year. Your salary from the previous year will be listed on this form.
  • Your corporation must withhold and pay the IRS income taxes for employees.
  • Your corporation must withhold and pay the IRS half of the Social Security taxes and Medicare taxes for each employee (also called payroll taxes or FICA taxes). The employee pays the other half of those taxes (that’s you, too).
  • Your corporation must pay unemployment taxes for you. FUTA, the federal unemployment tax, is 6% of the first $7,000 you make in employee salary. Depending on where you live, your state may require unemployment taxes be paid to them as well.
  • Your corporation will file an annual FUTA tax return on Form 940.
  • If it looks like you’ll owe more than $1,000 of income tax on your annual tax return, you as an individual (not your S corporation) will need to pay estimated quarterly taxes. You can use Form 1040-ES to do this.
  • Depending on where you live, your corporation may also have to pay state disability insurance or workers’ compensation coverage. Make sure you check with your state to find out about those requirements.
  • As an employee, you will need to file federal and state income taxes each year. You will report your income on a Form 1040.
  • Your corporation will also file an income tax return on a Form 1120S each year. This form will list income, deductions, profits, losses, and tax credits. Part of the form, Schedule K-1, will be given to each shareholder (that’s you again). Schedule K-1 will indicate any profits that you earned from the S Corporation. Any profits will need to be reported on your Form 1040 as well.

How am I supposed to remember all of this?

The great thing about owning a thriving business is that you are able to hire experts to help you, you don’t have to figure this all out yourself. Running payroll for your S Corp is not something that you want to mess up because then your taxes will be wrong and the IRS has very hefty fines if you do not file forms on time.

You will want to hire an accountant and set up a payroll service to complete all of forms that you need to operate as an S Corporation.

What payroll service do you recommend?

The only payroll service that I recommend is Gusto. They are truly an all-inclusive payroll service that automatically files all of the forms you need on time. On top of all of that, they have wonderful customer support.

You may say, “oh my bookkeeping service also offers payroll, I’ll just go with that”. This is a big mistake. Many bookkeeping systems offer payroll but they do not automatically file the necessary forms for you, which leaves you on the hook for any late forms.

Action Steps

  • Determine how much you should get paid and how often you should be paid by your S corporation by running an S Corp reasonable compensation report.
  • Decide if you are going to pay your salary with a check or transfer from your business account to your personal account and make sure you are documenting your pay correctly. Hint: You want to use a payroll service like Gusto.
  • Review all of the necessary tax documentation and payments that are necessary to run an S corporation and decide whether or not you’ll need professional support in that area.

How Do I Reach a Real Person at the SSA?

How Do I File Taxes If I Work Remotely?

 

Amy Northard, CPA

The Accountant for Creatives
+ taxes + bookkeeping + consulting
+ Hang out with me over on Instagram!

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