Setting up S-Corp payroll wrong creates ongoing headaches and potential IRS penalties. Get it right from the start and you'll save yourself years of compliance problems. Here's exactly how Denver S-Corp owners should set up payroll to meet IRS requirements.
Most Denver businesses spend $1,500 to $2,500 getting payroll established properly. That upfront investment prevents thousands in potential penalties down the road.
Before you can run payroll, you need an EIN (Employer Identification Number) from the IRS. This is separate from your personal Social Security number. Even if you're a single-member S-Corp, you need an EIN.
Apply for your EIN online at the IRS EIN application website. The process takes about 15 minutes. You'll receive your EIN immediately upon completion.
If you already have an EIN from when you formed your LLC, you can use the same number. You don't need a new EIN just because you elected S-Corp status.
Colorado requires employers to register for unemployment insurance. Even if you're the only employee of your S-Corp, you must register. Visit the Colorado Department of Labor and Employment website and complete the unemployment insurance registration.
You'll receive a Colorado unemployment insurance account number. Keep this number handy because you'll need it for quarterly unemployment tax filings.
Register with the Colorado Department of Revenue for state income tax withholding. You'll need your federal EIN and your business information. This registration gives you a Colorado withholding account number.
You'll use this account to remit Colorado income taxes withheld from your S-Corp wages. Our Denver bookkeeping services handle these registrations for clients who need help with the setup process.
Before setting up payroll, figure out your reasonable compensation. The IRS requires S-Corp shareholder-employees to receive reasonable compensation for services performed.
Research salary surveys for your position in your industry in the Denver area. Use the Bureau of Labor Statistics Occupational Employment and Wage Statistics tool to find median wages for similar roles.
Document your research. Create a memo explaining how you determined your salary, including references to salary surveys and market data. Our article on S-Corp reasonable salary rules provides detailed guidance on this critical step.
Colorado doesn't mandate a specific pay frequency for salaried employees, but you must pay at least monthly. Most Denver S-Corp owners choose biweekly (every two weeks) or semi-monthly (twice per month) pay schedules.
Biweekly payroll means 26 pay periods per year. Semi-monthly means 24 pay periods per year. The choice is yours, but be consistent. The IRS doesn't like seeing irregular payroll patterns.
You have three options for processing payroll: do it yourself manually using IRS tax tables, use payroll software like QuickBooks or Gusto, or hire a professional payroll service.
For S-Corp owners, we strongly recommend option two or three. Manual payroll is error-prone and time-consuming. Professional payroll services typically cost $1,200 to $2,400 annually for a basic single-employee S-Corp payroll.
Services like Gusto, ADP, and Paychex handle all the tax calculations, file your federal and state payroll tax returns, make tax deposits on time, and generate W-2s at year-end. The cost is worth avoiding payroll tax penalties.
The IRS requires employers to deposit payroll taxes (federal income tax, Social Security, and Medicare) on a schedule based on your total annual payroll tax liability. Most small S-Corps are monthly depositors.
Monthly depositors must deposit payroll taxes by the 15th of the following month. For example, taxes from January paychecks must be deposited by February 15.
If your annual payroll tax liability exceeds $50,000, you become a semi-weekly depositor with more frequent deposits required. The IRS Publication 15 provides complete details on deposit schedules.
Most payroll services handle deposits automatically. If you're doing it yourself, use the IRS EFTPS (Electronic Federal Tax Payment System) to make deposits.
If you pay health insurance premiums as a more-than-2% S-Corp shareholder, these must be included in your W-2 Box 1 wages. Set up your payroll system to add health insurance premiums to your gross wages each pay period.
The premiums should be included in Box 1 (wages) but not in Boxes 3 and 5 (Social Security and Medicare wages). Most payroll services have a specific code or setting for "2% S-Corp shareholder health insurance."
We covered this extensively in our article on S-Corp health insurance deductions. Make sure your payroll service understands this requirement, or you'll end up with an incorrect W-2.
S-Corps must file several quarterly payroll tax returns. Form 941 (Employer's Quarterly Federal Tax Return) is due April 30, July 31, October 31, and January 31. It reports wages paid and taxes withheld for the quarter. Colorado Wage Withholding Return is also due quarterly, reporting state income taxes withheld. Colorado Unemployment Insurance reports are filed quarterly with the Colorado Department of Labor.
Most payroll services file these returns automatically as part of their service. If you're doing payroll yourself, mark these deadlines on your calendar. Missing quarterly filings triggers penalty notices from the IRS and Colorado.
At year-end, you must file several annual forms. Form W-2 reports annual wages and taxes for all employees (including yourself), due to employees by January 31 and to the Social Security Administration by January 31. Form W-3 is a transmittal form that accompanies W-2s sent to the Social Security Administration. Form 940 (Federal Unemployment Tax) reports annual federal unemployment taxes, due January 31.
Again, most payroll services generate and file these forms automatically. This is why we recommend using a professional payroll service for S-Corp owners.
If you're the only employee of your Denver S-Corp, your payroll setup is simpler than multi-employee businesses. You still need to follow all the steps above, but you're only processing payroll for yourself.
Some payroll services offer discounted rates for single-employee businesses. Shop around and compare services. Make sure they specifically handle S-Corp payroll and understand the health insurance reporting requirements.
Some Denver S-Corp owners try to skip payroll entirely and just take distributions. This is a huge mistake. The IRS treats S-Corp shareholder-employees who don't take wages as violating S-Corp compensation rules.
In audits, the IRS reclassifies distributions as wages and hits you with back employment taxes, penalties, and interest. You lose all the tax savings that made S-Corp election attractive in the first place.
If you pay yourself a bonus or irregular compensation, it must go through payroll with proper withholding. You can't just take an extra distribution and call it a bonus. The IRS treats all compensation to shareholder-employees as wages subject to employment taxes.
Most Denver S-Corp owners keep their regular salary consistent throughout the year and then adjust their distributions up or down based on business performance. This is cleaner than variable salary amounts.
If your Denver S-Corp has multiple shareholders who work in the business, each must receive a reasonable salary. The salaries don't have to be equal, but they must reflect each person's role, responsibilities, and time commitment.
Document each shareholder's salary decision in corporate minutes. Explain why the CEO receives $100,000 while the part-time CFO receives $45,000. This documentation protects you if the IRS questions your salary allocations.
Late payroll tax deposits trigger automatic penalties from the IRS. Failure to file quarterly Form 941 results in penalty notices. Incorrect W-2 reporting creates problems when you file your personal return. Forgetting to include health insurance in W-2 wages costs you the deduction. Not paying yourself any salary while taking distributions invites IRS scrutiny.
These mistakes are entirely avoidable with proper payroll setup from the start. Our Denver business CPA services include payroll setup assistance to ensure clients avoid these common problems.
Your S-Corp payroll should integrate with your bookkeeping system. Each paycheck creates accounting entries for wages expense, payroll taxes expense, and payroll tax liability. Make sure your bookkeeper or accounting system properly records these transactions.
If you're using QuickBooks Online or similar software, most payroll services integrate directly. This creates automatic accounting entries each pay period and keeps your books accurate without manual data entry.
Payroll tax rules are complex. When questions arise, consult with a professional rather than guessing. The cost of a quick consultation with a CPA or payroll expert is far less than the cost of fixing payroll mistakes later.
Common questions Denver S-Corp owners ask: Can I change my salary mid-year? (Yes, with proper documentation.) Do I need to file Form 941 even if I'm the only employee? (Yes.) What if I forgot to withhold taxes from a paycheck? (Make a correcting entry on the next paycheck.) How do I handle a partial-year S-Corp election? (Process W-2 wages starting from the S-Corp effective date.)
Payroll isn't a "set it and forget it" system. Each year, update your federal and state withholding tables (tax rates change annually). Review your reasonable salary and adjust if needed based on business performance. Verify your contact information with your payroll service. Review payroll reports to ensure everything processed correctly throughout the year. Verify W-2s are accurate before distributing to employees.
Our tax strategy services include an annual payroll review to ensure Denver S-Corp clients are set up correctly for the new year.
If this seems overwhelming, you're not alone. Most Denver business owners aren't payroll experts, and that's okay. At Succentrix, we help S-Corp owners set up proper payroll systems from day one. We recommend appropriate payroll services, coordinate registration with federal and state agencies, determine reasonable salary levels, set up proper withholding for health insurance, and ensure ongoing compliance with quarterly and annual filing requirements.
The investment in proper payroll setup is typically $1,500 to $2,500 initially, plus ongoing payroll service fees of $1,200 to $2,400 annually. This cost is far less than the penalties you'd face for payroll mistakes, and it's a deductible business expense.
If you're starting an S-Corp in Denver or you're currently running one without proper payroll, reach out to our team. We'll get you set up correctly and ensure you're meeting all federal and Colorado payroll requirements. Don't let payroll mistakes undermine the tax savings that made S-Corp election worthwhile in the first place.
