The basics of running payroll for single shareholder S Corp
Do you need payroll for single shareholder S Corp?
You have learned the tax benefits of electing to be treated as an S Corporation and applied with the IRS. In the process, you are also aware of getting paid as a shareholder of the S corp. Let us discuss the whole process and the best way to do payroll for single shareholder S Corp.
Considerations before changing into an S company?
Before starting this process, you must consult a professional regarding the advantages and disadvantages of the S corp election. Not only do you need to learn about the outcome, but make sure your organization is eligible for this election too.
Payroll for single shareholder S Corp - The basics
Congratulations on being accepted as an S corporation; The next step is to find out how much and when you will get paid. In other words, you need to know how the payroll for single shareholder S Corp works. The starting point to determine your salary is the IRS rule regarding reasonable compensation for shareholder-employees. You need to follow this rule because it protects your company from assessments of tax penalties and interest.
What is reasonable compensation?
One of the significant factors used by the IRS to determine what constitutes reasonable compensation is the source of the S corporation gross receipts and what the shareholder-employee did for the S corporation to help generate those receipts.
Some other factors include:
Training and experience;
Duties and responsibilities;
Time and effort devoted to the business;
What comparable employers pay for similar services;
The use of a formula for determining compensation; and
Amounts paid out as salary compared with the amount distributed as profits.
What should be my payroll schedule?
Now that we have the payroll amount out of the way, you need to consider how often to receive your payroll. It is very tempting to pay yourself once a year to satisfy the reasonable compensation.
Once you receive the approval letter of your application to elect as an S Corporation, the IRS expects to receive payroll reports and payroll tax payments. The form you need to use is the 941, which is due quarterly.
In the ordinary course of business, payroll needs to be bi-weekly or bi-monthly but, as the only shareholder-employee of the S Corp, it will not be an issue to have payroll for single shareholder S Corp runs quarterly.
How to calculate net pay?
As an employer, you are liable for withholding taxes and other deductions from your gross wages as an employee. Figuring out how to calculate net pay is crucial for running an accurate and legal payroll.
Net pay is the take-home pay you receive after you withhold payroll deductions. You will find net pay by subtracting deductions from the gross pay: Net Pay = Gross Pay – deductions.
Your payroll deductions consist of federal income withholding, social security, and medicare. If you are in a state that requires payroll taxes, you may also need to withhold state and local income taxes.
How much is an S corp payroll tax?
Federal income tax withholding is calculated based on current tax rates and information provided by you, as the employee to the company on form W-4.
Every time you run payroll for single shareholder S Corp, expect your corporation to pay a combined 7.65% tax rate for Social Security and Medicare. The Social Security portion (OASDI) is 6.20% on earnings up to the applicable taxable maximum amount. The Medicare portion (HI) is 1.45% on all earnings.
The same percentage is withheld from your paycheck, which will be remitted to the IRS, using form 941, on your behalf along the company’s portion.
Calculating a paycheck seems complicated
As a small business owner, you do not have to waste your precious time trying to run payroll. Since the IRS views failing to pay payroll taxes as the cardinal sin of tax delinquency, payroll for single shareholder S corp should not be one thing; that you wish to mess up.
You will want to use the services of a professional accountant not only to run your payroll but ensure all paperwork related to your election are accurate and your payroll tax requirements taken care of.