How should I run payroll for an S corporation where I am the owner and sole employee?

by Ashley N. Blessing, CPA | May 10, 2019

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.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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