I am the owner and sole employee of an S corporation. I was advised to begin running payroll so I can pay myself a reasonable salary. I noticed that I am paying for an employee tax as well as an employer tax for Social Security and Medicare. If I'm being double taxed, should I avoid running payroll altogether?
The corporation pays its portion of employment tax on all wages paid and the employee pays theirs. You are not, then, subject to self-employment tax on those wages or the flow through income. As per IRS regulations, “S corporations must pay a reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before nonwage distributions may be made to the shareholder-employee.” If the shareholder wants to pull any monies out of the corporation, they should do so first by taking a wage. Then they can speak with their tax accountant to determine what amounts may be taken out as a distribution. With S corporations, there is the matter of basis to be discussed before distributions can be considered.
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Answered by: Ashley N. Blessing, CPA, is a supervisor with Herbein + Company Inc. in Reading, Pa.