An S corporation (S corp) is a type of business structure that offers the advantages of incorporation without the burden of double taxation. In this setup, shareholders report the company’s income on their personal tax returns, while the corporation itself is not taxed separately. Additionally, shareholder distributions are not subject to FICA taxes.
However, to prevent shareholders from avoiding payroll taxes altogether, there’s a key rule in place: shareholders who actively work for the business are considered employees and must receive a reasonable salary. This means that most S corps, even those with just one shareholder or employee, typically require a reliable payroll system.
At PaySteady, we help hundreds of S corps with payroll. Here are the 10 most common questions we receive from S corp owners and their advisors:
1. Do S corp owners have to take a salary?
Yes, if an S corp owner performs work for the business, the owner must take a reasonable salary before taking profit distributions. The IRS requires this to prevent tax avoidance.
2. What is a reasonable salary for S corp owners?
A reasonable salary is defined as the amount a similar business would pay an employee for comparable job duties. The IRS considers several factors when determining what qualifies as reasonable compensation, including:
- The owner’s training and experience
- The time and effort dedicated to the business
- Industry standards
- Business profits
If the IRS determines that an S corp owner did not receive a reasonable salary based on these factors, it can reclassify distributions as wages. This may result in the owner owing payroll taxes on that income, along with potential penalties.
We recommend that you consult with your accountant for advice on your specific situation.
3. How are owner salaries taxed?
As an S corp owner, your salary is subject to payroll taxes, including Social Security, Medicare, and federal/state income tax withholding.
Since you may take distributions as well as a salary, you may need to make estimated tax payments. For example, if your full year tax liability is $100k and your salary is $40k, you will still need to pay taxes on the remaining $60k. Talk to your accountant to see if estimated tax payments make sense for your situation.
4. Can S corp owners take distributions in lieu of a salary?
You may receive distributions along with a salary, but it does not count toward meeting the salary requirement. Unlike salary wages, distributions are not subject to payroll taxes and won’t appear on form W-2. If you do not take a reasonable salary, you could face penalties.
5. Do I need to register with any additional tax agencies?
Most likely, yes! While your company was registered with the IRS and state agencies when it was formed, additional registrations are typically required for processing payroll.
All businesses, including S Corps, usually need to register for state withholding and unemployment tax IDs. Depending on the state, this may involve separate applications or a single registration covering both. These IDs generally cannot be obtained in advance of starting payroll, so it’s unlikely that your accounts are already active.
Need assistance with state payroll tax registrations? PaySteady can help!
6. What are guaranteed payments?
Guaranteed payments are a type of fixed payment made to business owners for their services or investment. While common in partnerships, guaranteed payments are not typical for S corps. Instead, S corp owners receive salaries for active work and distributions for profit sharing.
7. Can S corp owners take a pre-tax deduction for health insurance?
S corporation shareholders who own 2% or more of the company cannot take pre-tax deductions through payroll, as is typically allowed for regular employees. Instead, it’s possible to still get similar tax benefits by following the steps below:
Step 1: The S Corporation Pays for the Health Insurance
- The S corp must either:
- Pay the health insurance premiums directly to the insurance provider, or
- Reimburse the owner for personally paid premiums.
Step 2: Report the Premiums on Payroll
- The total premium amount must be added to the owner’s W-2 wages as taxable income (typically in Box 1 - Wages, Tips, Other Compensation).
- However, this amount is not subject to FICA or FUTA taxes.
Step 3: Owner Claims the Deduction
- The owner can then deduct the premium cost on their personal tax return as a self-employed health insurance deduction (on Schedule 1, Form 1040), reducing their taxable income.
8. Can S corp owners contribute to a 401(k)?
Yes, owners can contribute as an employee (up to $23,500 in 2025, or $31,000 if 50+) and receive the standard employer match defined in their 401(k) adoption agreement.
9. What payroll taxes does an S corp pay?
S corps must pay the employer portion of FICA taxes (Social Security and Medicare) on owner and employee wages. This is 7.65% of taxable wages.
They will also pay Federal Unemployment Tax (FUTA) and typically State Unemployment Tax (SUTA). FUTA is usually $42 per person each year and SUTA is variable depending on the state.
10. What payroll system is best for S corps?
The unique needs of your business are more important than its entity type when choosing a payroll system.
Call us at (703) 672-1225 or email payroll@paysteady.com for a quick assessment and recommendation.