Payroll Taxes & S-Corporations

As the end of the year quickly approaches, business owners’ thoughts will also turn toward end of the year taxes. To assist with preparations for the upcoming tax filings, this month we have a guest blogger, Fiona Doyle from Paychex. Ms. Doyle’s comments below provide useful insights and suggestions that assist S-Corp. owners to properly plan for tax administration and compliance.

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S‐corps are the most common business entity in the United States, with 61.9% of all U.S. corporations electing federal tax treatment under subchapter S. An S-Corporation is a type of business entity that allows income to flow through the corporation without being taxed until it is claimed as income by the shareholder(s). An S-Corporation Shareholder/Owner may take a portion of their income as a distribution, which is subject only to personal income taxes (federal & state withholdings). The remainder of the shareholder’s income must be classified as a “fair and reasonable salary.” This income is subject to all applicable payroll taxes. A shareholder should discuss what amount of their income should be distribution and what amount should be salary with their CPA. If an S-Corp owner reports dividends with no payroll income, the IRS may audit and reclassify distributions as “reasonable compensation,” so it is important that a shareholder seek the advice of tax professional. The monies that are reclassified are subject to FICA and FUTA - plus penalties for late deposits. The IRS may also assess penalties and interest for not filing the appropriate payroll tax returns in a timely manner. With year-end quickly approaching, now is the right time to evaluate whether or not your income has been properly accounted for in 2011. Before the year closes, speak with your tax professional to determine if you need to appropriate any income you’ve taken as salary. If you do, then you will need to process a year-end payroll.

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Thank you to Fiona Doyle for her comments on payroll tax compliance. If you would like to learn more, then please reach out to Fiona Doyle Kelley at 650-624-0777, ext. 54006 or fdoyle@paychex.com.

Whenever, I assist with the formation of a business entity, one of the components that we address is payroll administration. I strongly advise my clients to consider using a payroll service so that they can focus their time on running their business instead of navigating the myriad of ever-changing payroll regulations. If you need assistance with business entity formation, then contact Ronnie Gipson at (415) 692-6523 or Gipson@higagipsonllp.com.