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.