How to Manage Payroll for Your S-Corp: A Quick Guide

Running payroll with pen and paper

As an S-Corp consultant, payroll is essential for compliance and tax savings. Follow this guide to get it right without fuss.

Why Payroll Matters

Payroll is the means by which you pay yourself a “reasonable salary,” letting you reduce self-employment tax on distributions. It requires withholding Social Security, Medicare, and income taxes, filing quarterly returns and unemployment insurance. Missing deadlines can trigger penalties.

Picking a Payroll Solution (or DIY)

Many consultants use a payroll service such as Gusto, or Paychex for easy setup and automatic filings.

If you prefer a DIY approach, you’ll need to calculate gross wages based on industry benchmarks, withhold federal and state taxes plus FICA (6.2% Social Security, 1.45% Medicare), deposit taxes on the IRS schedule (monthly or semi-weekly), and file Form 941 each quarter. While DIY used to be somewhat common the prevelance of lower cost payroll solutions mean fewer do it on their own anymore.

Setting Up Your Workflow

If have not already obtained an EIN from the IRS you will need to do so first. Then, register with your state’s labor department and tax agencies to set up unemployment insurance (UI) and state withholding accounts if required. Decide on a payroll schedule - monthly and twice monthly tend to work best. Next, configure your chosen payroll software by entering your business information, creating an “owner’s salary” line, and adding any deductions (such as retirement). Determine a defensible “reasonable salary” by consulting salary surveys or Bureau of Labor Statistics data, and document your reasoning in case of IRS inquiries.

Running Payroll

Choose a fixed amount for each pay period (for example, a monthly salary). Use IRS Publication 15 for federal income tax withholding calculations and include any state withholding rates. Compute employer taxes by matching the 6.2% Social Security and 1.45% Medicare contributions, plus FUTA (0.6% effective) and state UI. Deposit all payroll taxes on time assuming your liability remains under $50,000 per quarter this means monthly. Store your pay stub that clearly shows gross pay, itemized withholdings, and net pay for recordkeeping.

Filings and Recordkeeping

File Form 941 each quarter (federal) along with any state equivalents. Submit Form 940 (FUTA) and W-2/W-3 by January 31 annually. Maintain records for at least four years, including payroll registers, tax deposit confirmations, filed returns, and W-2/W-3 forms. Setting calendar reminders—or letting your payroll provider manage deadlines—helps you avoid late-filing penalties.

When to Automate or Outsource

While you might be able to DIY, a payroll service will provide more flexibility and stay on top of things like state unemployment plus facilitate retirement contributions. Alternatively a fullstack service like S Works can handle bookkeeping, taxes compliance filing as well as payroll so you stay focused on consulting.