How do I pay myself as an S-Corp owner?

Paying yourself correctly as an S-Corp owner involves two distinct payment types: wages (through payroll) and owner distributions (from after-tax profits). Getting the mechanics right is critical for both tax compliance and audit protection.

Step 1: Set up payroll

Before paying yourself as an S-Corp employee, you must: - Obtain an Employer Identification Number (EIN) from the IRS if you do not already have one - Register as an employer with your state - Set up a payroll system (payroll software or use a payroll service provider) - Complete Form W-4 as both employee and employer

Step 2: Run payroll for your salary

Your S-Corp pays you a salary as an employee. For each payroll run, you must: - Calculate gross wages (your agreed salary amount) - Withhold federal income tax (using W-4 elections) - Withhold employee FICA: 7.65% on wages up to $168,600 (6.2% Social Security + 1.45% Medicare) and 1.45% on wages above $168,600 - Calculate employer FICA: matching 7.65% (paid by the S-Corp, deductible as a business expense) - Withhold state income tax if applicable - Pay yourself the net amount

Step 3: Remit payroll taxes

Federal payroll taxes (income tax withheld plus both employee and employer FICA) must be deposited to the IRS. Most small employers deposit monthly or semi-weekly depending on the dollar amount. Deposits are made through EFTPS.

You must also file quarterly Form 941 (Employer's Quarterly Federal Tax Return) reporting wages, taxes withheld, and employer FICA. Form 941 is due April 30, July 31, October 31, and January 31.

Step 4: Issue W-2 at year end

By January 31, you must issue yourself a W-2 form showing total wages, federal income tax withheld, and FICA withheld. You file Copy A with the Social Security Administration along with Form W-3 by January 31.

Step 5: Take distributions

After paying yourself a reasonable salary, you can distribute additional profits from the S-Corp. Distributions are: - Paid from the S-Corp's accumulated earnings and profits - Not subject to FICA (this is the primary tax advantage) - Included in your personal income tax return via Schedule K-1 - Taxed at ordinary income rates (not capital gains rates, for most distributions)

You can take distributions as frequently as you like, subject to the S-Corp having sufficient retained earnings. You cannot take a distribution that would leave the corporation with negative basis.

How W-2 wages and K-1 income are reported

At tax time: - Your W-2 wages are reported on Line 1a of Form 1040 - Your S-Corp K-1 income (the pass-through profit) is reported on Schedule E, Part II - Deductible one-half of SE tax and QBI deduction may apply - S-Corp health insurance premiums are included in W-2 Box 1 wages but can be deducted on Schedule 1 as self-employed health insurance

Payroll software options

Most S-Corp owners with only one employee (themselves) use simple payroll software. Popular options include Gusto, QuickBooks Payroll, ADP Run, and Paychex. These handle tax calculations, deposits, 941 filings, and W-2 generation automatically. Expect to pay $50-100/month for a single-employee payroll.

Health insurance and S-Corp owners

S-Corp owners who own 2% or more of the company can have the S-Corp pay health insurance premiums. These premiums must be included in the owner's W-2 Box 1 wages (making them taxable for income tax purposes) but can then be deducted as self-employed health insurance on Schedule 1, effectively making them deductible for income tax but not FICA. Premiums are not subject to Social Security or Medicare taxes.