Officer-only Payroll: How to Pay Officers Under an S-corp
Managing an S-corp comes with some special tax benefits that sole proprietors don’t get to enjoy but also includes payroll responsibilities they don’t have. All S-corp officers (i.e., CEO, CFO, COO) are treated as employees and must be handled appropriately to avoid fines, penalties, and other legal consequences. They must be paid a reasonable salary, have payroll taxes withheld, and receive compensation on a regular schedule. They’re also entitled to receive year-end tax forms for reporting purposes.
If you need help with your Officer-only payroll, consider Cirrus Payroll. We have payroll experts that will ensure your payroll is processed according to schedule, every time. And payroll taxes are calculated, withheld, and remitted to the appropriate agencies, so you don’t have to worry about errors or late fees. In addition, we run a paperless system, so both you and your employees can view all payroll data online. Request a free quote today.
How to Set a Reasonable Salary
Although there aren’t any hard rules to govern the definition of a “reasonable salary,” there are some factors that the courts have identified as important to ensure S-corps don’t skirt the rules by paying officers a minimal amount. To ensure you’re paying out a reasonable salary, you should consider the following:
- Duties and responsibilities of each position
- Training and education that officers have
- Time devoted to the company
- Dividend history
- Payments to non-shareholder employees
- Compensation agreements
One best practice is to compare the salary you’re paying an officer to the salary other companies pay traditional employees for similar work. If you notice any large variances, there’s a strong chance you’ll need to adjust their pay.
In addition to paying yourself (if you’re an officer) or other S-corp officers, you’ll need to withhold payroll taxes and send payments to the IRS. Similar to how employers manage withholdings for regular employees, you’ll need to deduct money to pay Social Security and Medicare taxes, 6.2% and 1.45%, respectively. You’ll also need to pay a matching amount from the S-corp’s funds. Other taxes you’re responsible for paying are:
- Unemployment taxes: The business will need to pay this (federal unemployment taxes are 0.6% of the first $7,000 of each officer’s earnings); you should not withhold this from employee pay. There may also be state unemployment taxes to consider.
- Income taxes, depending on the state and/or city: This is strictly for employees to pay; some states don’t have an income tax.
2% shareholder & Health/Accident Insurance Premiums
The IRS considers any officers who own more than 2% of the shares in the S-corp “more-than-2%-shareholders.” If any of your S-corp’s employees fall into this category and the company pays health or accident insurance premiums for them (even if just a percentage or partial amount), the amount must be reported as taxable wages. You won’t need to withhold or pay FICA or FUTA taxes on it, but the employee will be responsible for paying federal and state (if applicable) income taxes on the total.
Reporting Health Insurance Premiums on Form W2
At the end of the year, you’ll need to add the total health and accident premiums you’ve paid throughout the year to each officer’s W-2 Form. You should include the amount in Box 1 that shows the employee’s total gross pay but not Box 3 or 5 which only includes pay that is subject to FICA taxes.
Sum It Up
Processing payroll for the officers of an S-corp is similar to the way you’d manage it for traditional employees. You need to ensure you set a reasonable salary based on the services they provide vs paying them an arbitrary amount and both withhold and pay payroll taxes. If you pay insurance premiums, you may need to report them as taxable income, depending on how many company shares the officer owns.
Cirrus Payroll can help you pay your officers on time and accurately. We calculate payroll taxes at the federal, state, and local levels, so you don’t have to. And we make payments to each applicable tax agency, as required. At year-end, we also handle employee tax reports; we prepare them and make them available to your employees before the January 31 deadline. Sign up for a free quote.