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ACCOUNTANT SPOTLIGHT: S Corp Payroll — What You Need to Know

Did you know that sixty-two percent of accountants take on processing S corp payrolls to make it easier for their clients?1 But for many CPA firms, it only makes your job more difficult.

S corps enjoy limited liability and can elect to pass corporate income, losses, deductions and credits through to their shareholders for federal tax purposes. Many organizations choose an S corp over an LLC for benefits like these:

  • Pass-through taxation — Owners report their share of profit and loss on their individual tax returns
  • Limited liability — Company directors, officers, shareholders and employees receive limited liability protection
  • One-time annual tax filing requirement — C corps must file quarterly
  • No double taxation — Income isn’t taxed twice as corporate and dividend income
  • Investment opportunities — Companies can use the sale of stock shares to attract investors

But S corps still face unique restrictions that don’t apply to other business entities — like evaluating and choosing a compensation structure that meets IRS standards. And that’s where clients and their accountants often disagree.

Payroll vs. dividends: Defining reasonable compensation

S corp shareholders generally prefer taking dividend distributions over compensation payments, because compensation payments are subject to payroll taxes and distributions are not. To prevent S corps and their shareholders from avoiding payroll taxes, the IRS requires S corps to pay shareholders who provide substantial services “reasonable compensation.”

Compensation for S corp shareholders is a hot issue with the IRS. As their strategic advisor, clients may rely on you to help determine a compensation structure that meets IRS guidelines, then handle all the tax and payroll obligations that go along with it.

Avoiding expensive compliance headaches

Officers in an S corp are often paid on an annual or quarterly basis — very different from the typical business payroll. So it’s important to work with a payroll vendor that understands the distinction, because strict guidelines and earlier reporting deadlines don’t leave much margin for error.

For example, full-service officer-only S corp payroll from ADP® is designed to help you get ahead — and stay ahead — of your clients’ year-round compliance activities:

  • Pay frequency that best fits each client, including the option to process one-time annual payrolls
  • Simple reporting of fringe benefits on annual forms
  • Automated account notifications when payroll deadlines are approaching
  • Flexible payment options to compensate your officer-only clients
  • Filing of all federal, state and local taxes and forms
  • Comprehensive reporting tools and general ledger interface
  • Optional add-on retirement savings services that integrate directly with payroll

To learn more about how ADP’s officer-only S corp payroll package can assist you and your clients at year-end and in 2018, contact your dedicated ADP sales representative or visit adp.com/scorp.

Copyright © 2017 ADP, LLC. ADP is a registered trademark of ADP, LLC.
The information provided here is for general informational purposes only and not legal, insurance, financial or tax advice. The information and services ADP provides should not be deemed a substitute for the advice of a professional who can better address your specific concern and situation. Any information provided here is by nature subject to revision and may not be the most current information available on the subject matter discussed.
1Accountants Confidence Index (ACI), Accounting Today Executive Research Council, September 2016
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