S Corporation Payroll Taxes

Unlike a sole proprietor who simply pays self-employment tax on their net profit, an S Corporation owner who works in the business is treated as a W-2 employee of the corporation, which means the company must establish payroll and withhold taxes just like any other employer. The corporation is responsible for withholding federal income taxes and the employee share of Social Security and Medicare taxes from each paycheck, and it must also pay the matching employer share of those payroll taxes. The tax savings from the S Corporation structure come from the fact that only wages are subject to payroll taxes while distributions paid to shareholders are not. The corporation must file quarterly payroll tax returns on Form 941 and issue a W-2 to each shareholder employee at the end of the year. Failing to run payroll or treating a shareholder employee as an independent contractor rather than a W-2 employee is one of the most common and expensive mistakes that S Corporation owners make.