1. Understanding Reasonable Compensation Requirements

One of the most critical compliance issues for S-Corp owners is the requirement to pay themselves a "reasonable salary" for services performed. The IRS scrutinizes this issue carefully because S-Corp profits passed through to shareholders are not subject to self-employment taxes, while wages are.

Key Guidelines:

• Establish a defensible salary: Base compensation on industry standards, job duties, experience, geographic location, and time devoted to the business.

• Document the basis: Keep supporting evidence such as salary surveys, job descriptions, and time logs.

• Avoid token salaries: Low or symbolic salaries are red flags to the IRS.

2. Use a Payroll Service or Software

Even for a single-owner S-Corp, managing payroll manually increases the risk of calculation errors and missed deadlines.

Recommended Practices:

• Automate payroll filings: Use a payroll provider that can file IRS Forms 941, 940, W-2, and W-3 on your behalf.

• Schedule federal and state deposits automatically: Missing deposit due dates triggers penalties.

• Track payroll deductions: Accurately withhold and remit federal income tax, Social Security, Medicare, and state/local taxes.

Popular payroll platforms for S-Corp owners include:

• Gusto

• ADP Run

• QuickBooks Payroll

• Patriot Payroll

3. Withholding and Employer Payroll Tax Responsibilities

S-corp owners acting as employees must have proper withholdings. The corporation must also pay the employer portion of FICA taxes.

S-corp Payroll Tax Responsibilities:

• Withhold from employee paycheck:

  • Federal income tax (based on Form W-4)

  • Social Security (6.2%)

  • Medicare (1.45%)

• Employer matches:

  • Social Security (6.2%)

  • Medicare (1.45%)

Additional taxes may apply in certain states (e.g., state unemployment tax).

4. Make Timely Payroll Tax Deposits

Failure to remit payroll taxes is considered a serious violation. The IRS can impose penalties up to 100% of unpaid taxes under the Trust Fund Recovery Penalty rules.

Deposit Guidelines:

• Form 941 taxes (quarterly): Deposit monthly or semi-weekly, depending on your deposit schedule.

• Form 940 (federal unemployment): Typically deposited quarterly if liability exceeds $500.

• Use EFTPS.gov: All federal payroll tax deposits must be made electronically.

5. File Required Payroll Forms on Time

Compliance includes not just collecting and paying taxes, but also submitting the correct filings.

Important Deadlines:

• Form W-2 to employees: January 31

• W-2/W-3 to SSA: January 31

• Form 940 & 941: As specified quarterly/annually

6. Maintain Payroll Records

Recordkeeping is essential for audits, compliance, and correcting errors. The IRS requires employers to keep records for at least four years.

Maintain Records For:

• Gross wages

• Withholding amounts

• Payroll tax deposits

• Tax forms filed

• Time worked and benefits accrued

7. Consider Reasonable Salary Adjustments Annually

Market conditions, business growth, and changes in the owner’s role may necessitate a salary adjustment. Annual reviews and adjustments help maintain compliance and reduce audit risk.

Annual Review Checklist:

• Compare with updated industry compensation benchmarks

• Assess time commitment to the business

• Document changes in duties or business size

8. Avoid Common Mistakes

Mistakes to Avoid:

• Paying shareholder distributions without wages

• Failing to issue a W-2 to yourself as owner-employee

• Missing tax deposit deadlines

• Misclassifying workers as independent contractors

• Ignoring state-specific payroll requirements

9. Consult a Tax Professional or Enrolled Agent

For S-Corp owners, payroll intersects with income tax planning, retirement contributions, and corporate compliance. A qualified tax advisor can:

• Help determine a defensible salary

• Oversee proper payroll processing

• Advise on tax-efficient compensation structures (e.g., salary vs. distributions)

• Ensure all required federal and state filings are made timely

Firms like Scorpio Tax Management specialize in payroll and compliance for small S-corps, offering proactive advice tailored to owner-employees and ensuring all documentation is in order in case of audit.