How to Calculate S Corporation Payroll

S Corp Payroll | ADP

You may be wondering how to calculate S corporation payroll. There are several things to consider, including Employee salaries, Social Security and Medicare taxes, and shareholder distributions. In this article, we will look at the different ways to calculate the payroll of an S corporation. Once you understand these basics, you can estimate s corp payroll | taxes, requirements, how to calculate, & more. Listed below are the steps you should take to calculate the payroll of your S corporation.

Employee salaries

An S Corp salary is the compensation paid to shareholders involved in the business’s daily operations. Some shareholders prefer to receive dividend distributions from their company rather than settle in the form of salary. Compensation payments are subject to payroll taxes, while dividend distributions are not. As a result, it is difficult to determine a reasonable salary for an S Corp shareholder.

Officers and directors determine what is fair for the employees for S corporation salaries. Sometimes, employees set their salaries alone or in a joint venture. One individual or a single shareholder owns a majority of S corporations. While an S Corp employee’s salary can be higher than what the shareholder would receive from the business, it must be reasonable based on the business’s success. A good wage is based on the work performed, the available cash, and the timing of the payments. It is recommended that this calculation be updated regularly based on the business’s success.

Social Security taxes

An S-Corp payroll involves calculating the tax on employees’ wages during a pay period. Consistency is critical. In addition to the usual weekly pay period, an S-Corp may decide to pay bonuses to its shareholders or reduce its shareholder-employee compensation. There are many things to consider when determining your payroll taxes.

First of all, remember to take into account the effect of dividends paid to owner-employees. While these dividends are excluded from calculating your Social Security taxes, they affect your taxable income. In addition, unlike wages paid to employees by a traditional corporation, an S-Corp payroll’s Social Security tax portion is paid only on salary and not the entire profit. Therefore, reducing your compensation may positively impact your Social Security retirement benefits.

Medicare taxes

When calculating the S Corp payroll, you must consider the FICA and Medicare taxes you must withhold from each employee. The Social Security and Medicare taxes are 1.45% and 6.2% of employees’ gross taxable wages, respectively. You can use Publication 15-T to determine how much federal income tax you must withhold from each employee’s pay.

Shareholder distributions

S Corporations must pay shareholders reasonable compensation, as defined by the IRS. The IRS considers shareholder contributions as employee duties, and the pay must be comparable to what other similar enterprises would pay. It is, therefore, imperative for owners to determine the appropriate shareholder compensation for the particular job.

The IRS will closely examine the distributions made by an S corporation. The goal is for every shareholder to receive an allotment on the same date in proportion to their share ownership. Therefore, recording shareholder names and dollar amounts are also critical. Regarding the number of distributions per year, you should try to stick to a specific schedule. If possible, you should divide each distribution equally by using the 60-40 method.

Tax implications

When calculating the S Corp payroll, you have to keep several factors in mind, including the amount of salary you can afford to pay. You must also be reasonable in your salary calculation since underpaying yourself can put you at risk for auditing by the IRS. Therefore, you should try to maintain a proper salary balance between maximizing your savings and minimizing your risk, and a CPA can help you determine this balance.

Often, payroll for an S Corporation varies from quarter to quarter. Payroll amounts are based on the gross income and expenses of the company. Although it can be tricky, the IRS has a rule of thumb that states that your payment is divided 60 percent into salary and 40% into dividends to shareholders. S Corporation payroll is not an exact science, and accountants strive to make it as accurate as possible.