Becoming an S corp provides you with added liability protection and advantageous tax benefits. However, these advantages come with certain requirements. Besides compliance rules about domestic ownership and share maximums, you must also make sure to pay yourself a salary. To make paying a salary and complying with your regulatory requirements easier, it’s important to work with a professional payroll provider. 

How an S Corp Works

Thanks to its benefits as a pass-through entity, S corps experienced faster growth than any other business structure from 1980 to 2011. Today, S corps make up 13.1% of all businesses in the country.

There are six essential steps involved in starting an S corporation. 

1. Set a reasonable salary for owners. 
2. Correctly calculate your payroll and tax withholdings. 
3. File your federal payroll taxes each quarter.
4. Keep an accurate record of your payroll transactions.
5. File payroll taxes with your state.
6. File your S corporation’s tax returns each year.
   

The Tax Advantages of an S Corp

When you set up an S corp, it carries important tax advantages. You must file the S corp’s tax return each year, but the S corp’s profits and losses aren’t taxed. Instead, all of these profits and losses are passed on to the owners. 

If you were a sole proprietor who earned $100,000, you would normally have to pay a self-employment tax of 15.3% or $15,300. With an S corp, you are paid a salary that ends up being taxed at 15.3% for Medicare and Social Security taxes. However, you can also take owner distributions, which don’t receive the same 15.3% tax.

For example, let’s assume that you pay yourself a salary of $60,000 and owner distribution payments worth $40,000. You would be taxed $9,180 on the $60,000, but the 15.3% tax wouldn’t apply to the remaining $40,000. As a result, incorporating as an S corp would allow you to pay $6,120 less in taxes each year.

Your Salary Requirements Under S Corp Rules

It’s important to remember that the Internal Revenue Service (IRS) requires S corp owners to be paid a reasonable salary. While the IRS doesn’t specify what constitutes a reasonable salary, they do discuss some of the factors you must consider when creating your salary. 

Training

History of dividend payments 

Responsibilities 

Compensation agreements in effect

Using a formula to determine the compensation

Payments made to non-shareholder employees

How comparable organizations pay workers in similar roles

Effort devoted to the company

Your S corp status can be removed if you don’t pay yourself a salary. As a result, you may have to pay back taxes. If the IRS takes three years to catch up with you, you’ll end up paying back taxes for all of those years.

How a Professional Payroll Provider Can Help Your S Corp

As an S corp, you’re legally required to pay yourself a salary. To do this, you must calculate wages, withhold taxes, and obtain a federal employer identification number (EIN). Additionally, you must file quarterly and annual tax forms for your business. 

All of these calculations and tax filings can be challenging to navigate if you aren’t an experienced payroll provider. Because of this, it’s generally a good idea to get professional help with handling your S corporation’s payroll each month.

Develop Accurate Calculations 

One of the most important reasons why you need a professional payroll provider is so that you calculate your payroll correctly. You need to withhold the correct amount for income taxes, Medicare, state unemployment taxes, Social Security, and federal unemployment taxes. If you withhold the incorrect amount, you can end up dealing with back taxes and penalties in the future. By partnering with a payroll provider, you can ensure accurate calculations every month.

Submit Payroll Taxes to the State and Federal Government

Once your payroll has been calculated, the payroll provider can automatically calculate and file tax withholdings on your behalf. They handle payroll and tax withholdings, so you don’t have to worry about your compliance requirements. By ensuring timely payroll tax submissions, you can avoid penalties and fines. 

Maintain Records of Your Payroll Transactions 

A payroll provider will do more than calculate payroll and withhold taxes. They’ll also keep a careful record of everything they do. If you are ever audited for any reason, you’ll have an accurate record of all your payroll transactions. These records are also useful for showing the IRS that you have fulfilled your S corp duty to pay yourself a reasonable salary.

Determine a Reasonable Salary

As an S corporation owner, you are legally required to be paid a reasonable salary. However, calculating this salary amount can be tricky. Top payroll companies have software tools that help them automatically compare the salaries of people performing similar jobs in your area. With this information, you can determine what salary you should be paid. 

Ensure Regulatory Compliance

There are many different federal, state, and local laws that govern payroll and taxes. Other than filing quarterly and annual tax documents, you must also file W-2 forms for all of your employees. Regulations change frequently, so it’s essential to work with a payroll company that keeps track of compliance updates for you. 

Take Advantage of General Ledger Integrations

With a top payroll provider, you get general ledger integrations. This means you can instantly upload your payroll information to your accounting software. Besides reducing the labor costs involved with data entry, general ledger integrations prevent human errors.

Expand Into Multiple States

In a recent Mission to Grow podcast on “Entity Classification: Exploring the Benefits and Risks of S Corps”, Jason Blumer, CEO of Blummer & Associates, discussed why it’s so vital for small businesses to work with a payroll provider when they start expanding into new states. “If you are trying to grow your business in multiple states, you should not be doing that on your own. A payroll provider that gets you into multiple states–that’s one of the most complex ways to set up your payroll. And that’s a risk you should not take. It’s foolish. It’s not even that expensive to get a payroll provider to file you in multiple states. When you start going into multiple states, you’re getting out of your comfort zone, and you need a professional to do that.” 

Focus on What You Do Best 

You built your business because you excel at a particular niche. Devoting your time and energy to learning about payroll compliance and tax withholdings is a waste of your talent. By letting a payroll provider handle these tasks, you can concentrate on what you do best.

Prepare Your S Corp for Long-Term Growth

An S corp is one of the best business structures for taking your company’s growth to the next level. However, there are strict rules about how you are supposed to manage your business to maintain your S corp status. To ensure you’re in compliance with state, federal, and local laws, you need a payroll provider to handle your payroll and tax withholdings.

If you need help setting up your S corp’s payroll, reach out to our team of small business payroll and HR experts today.