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 accounting firms, it may only make 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 pass-through taxation, limited liability and one-time annual tax filing requirements.
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 can sometimes 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. Clients often rely on their accountant 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.
Working with a payroll vendor that understands the distinction can help, since strict guidelines and earlier reporting deadlines don't leave much margin for error. Companies like ADP® offer a full-service officer-only S corp payroll designed to help you 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
- Filing of all federal, state and local taxes and forms
- Comprehensive reporting tools and general ledger integration with QuickBooks® and other popular accounting software
- 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 2020, contact your dedicated ADP sales representative or visit adp.com/scorp.
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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.
[1] Accountants Confidence Index (ACI), Accounting Today Executive Research Council, September 2016