If you operate your business as an S corporation and you provide services as an officer-employee of the corporation, for tax purposes you need to pay yourself a reasonable salary. That means that you have payroll tax obligations. And if you have other employees, you would need to pay their wages or salaries and handle the tax withholding and reporting for them.
Handling the payroll taxes for your S corporation involves basically the following:
- 1. Apply for an employer identification number (EIN):
You would generally apply for an EIN when you set up your S corporation initially. You can apply for an EIN online on the IRS website.
- 2. Obtain Forms W-4 from your employees and prepare a W-4 for yourself as officer-employee:
You need the filing status and number of exemptions claimed by each employee, including yourself, in order to determine the amount of federal income tax to be withheld.
- 3. Pay wages and salaries and withhold FICA, federal income tax, and state income tax:
Wages and salaries are paid according to the agreed rate and payroll period, generally weekly, bi-weekly, semi-monthly or monthly. Social security tax is withheld at 6.2% on total wages up to the social security wage base limit of $117,000 for the year (in effect for 2014). Medicare tax is withheld at 1.45% with no wage limit. To determine the amount of federal income tax to withhold, you can generally use the wage brackets or the percentage tables in IRS Publication 15, (Circular E), Employer’s Tax Guide.
If the salaries and wages paid by your S corporation are subject to state income tax, you would also have to withhold the applicable amount of that tax. You should check the website of the state department of revenue or taxation to find more information on state income tax withholding.
- 4. Prepare and file Form 941 Employer’s Quarterly Federal Tax Return and deposit the taxes withheld and the employer’s portion of the FICA tax:
Form 941 is filed quarterly to report the amount of FICA tax withheld and the employer’s equivalent portion. So, you as an officer-employee of the S corporation would be subject to FICA withholding on the salary the S corporation pays you, and as the owner of the S corporation you would have to pay the equivalent employer’s portion of the FICA tax. In effect, you are paying self-employment tax at a total rate of 15.3% on the amount of salary you pay yourself from the S corporation.
Also, if you pay any employee more than $200,000 per year, the Additional Medicare Tax of 0.9% applies on the excess. This tax applies only on the employee, not on the employer.
Payroll tax deposits must be made either monthly or semi-monthly, depending on the total tax liability reported on Form 941 during a four-quarter look-back period. During the first calendar year of your S corporation, your look-back period liability is zero and you must deposit payroll taxes monthly. The deposit is due by the 15th of the following month. Deposits must be made electronically and you can use the EFTPS, Electronic Federal Tax Payment System. This is a free service provided by the U.S. Department of the Treasury.
According to the IRS, you can make a payment with Form 941 without depositing if your total tax liability on Form 941 for the current quarter or the preceding quarter is less than $2,500.
The due dates for filing quarterly Forms 941 are April 30, July 31, October 31 and January 31. Form 941 can be filed online.
- 5. Prepare and file Form 940 Employer’s Annual Federal Unemployment (FUTA) Tax Return:
Generally, your S corporation would be subject to federal unemployment tax if you paid wages of $1,500 or more in any calendar quarter last year or this year, or you had one or more employees in any of 20 or more different weeks last year or this year. The federal unemployment tax is 6% on the first $7,000 you pay to each employee during the year.
You may also be subject to state unemployment tax. In that case, you can claim a credit of up to 5.4% for state unemployment taxes, reducing the federal rate to 0.6%. Federal unemployment taxes are calculated quarterly and must be deposited once your tax liability reaches $500. Form 940 must be filed by January 31 of the following year.
- 6. Prepare and file state income tax withholding and unemployment tax returns, as applicable:
Check your state’s department of revenue or taxation website to find more information on the requirements for reporting state income tax withholding and unemployment tax.
- 7. Issue Form W-2:
Prepare a Form W-2 from the S corporation to you as the officer-employee and any other employees of the S corporation by January 31 of the following year. The W-2s also need to be sent to the Social Security Administration. If you send paper copies, you would send them along with Form W-3, Transmittal of Wage and Tax Statements by February 28. Or you can file them online with the Social Security Administration by March 31.
- 8. Keep records:
If you have accounting software for your S corporation, you can probably handle the payroll accounting on that software. Otherwise, keep up-to-date and accurate records of all your salaries and wages, tax withholding and deposits, and payroll tax liabilities and payment.
Apply for an Employer Identification Number (EIN) Online, IRS
EFTPS, Electronic Federal Tax Payment System
Employer W-2 Filing Instructions & Information, Social Security Administration
Employment Tax Due Dates, IRS
Employment Taxes – Electronic Filing and Payment Options, IRS
Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
Form 941, Employer’s Quarterly Federal Tax Return
Form W-2, Wage and Tax Statement
Form W-4, Employee’s Withholding Allowance Certificate
Publication 15, (Circular E), Employer’s Tax Guide, IRS