S-Corp Officer Tax Planning: Payroll Withholding vs. Quarterly Estimated Tax Payments
Determining tax withholding for corporate shareholder pay, including those of an LLC taxed as an S corp, is not as simple as filling out a W-4. Shareholders receive income from their W-2 salary/wage, as well as from Schedule K-1 pass-through income generated to them as shareholders of the entity.
Can ASAP help with my officer payroll tax planning?
As your payroll service provider we would love to help, but this area of accounting is more suitable for your CPA or other certified tax advisor. In a perfect world, you would work with them after completing your prior year returns to help guide your tax strategy for the current year. They may instruct you to make quarterly estimated tax payments outside of the withholding we deduct from your W-2 wages. In the fall, they may ask for an update of the business' YTD performance and your expectations to evaluate if additional withholding should be required prior to year end. If perfection isn't possible, you may need to review your prior year returns to see how much Fed/State income taxes you paid, compare that to your YTD W-2 Fed/State income withholding and any quarterly estimated tax payments made to determine a preferred amount of Fed/State income tax to withhold prior to year end. Doing this at the end of the year can be challenging in particular while ensuring adequate cash flow for the business and yourself.
Do I still need to make quarterly estimated tax payments?
Possibly. Quarterly estimated tax payments are individual tax payments that the IRS instructs taxpayers to make to avoid penalties for underpayment of taxes. The IRS is okay with those estimated income tax payments being made via mail with a 1040-ES coupon or you can set yourself up to pay online. However, payroll income tax withholding that is reported on a W-2 also is allowed to offset those estimated tax payments. You can instruct ASAP to withhold a specific target amount for Fed and State income taxes from your salary payments to accommodate estimated taxes.
What if I don't think I'll owe as much as last year?
While you may receive coupons and instructions to make payments based on the prior year return to avoid penalties, if your income is expected to be significantly lower, you may not owe as much as previous years. However, to calculate your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. The IRS provides a worksheet in the 1040-ES packet to assist with calculations, but often this turns into work a CPA would provide for their clients. ASAP isn't your income tax preparer or CPA, so we can't really assist in this type of estimation. You can give us your prior year income tax figures from your 1040 to use as your target, but that is the simplest method and doesn't take into consideration your actual current year situation. Estimated state income tax payments follow a similar methodology.
Disclaimer: This information is provided as a self-help tool and does not constitute legal or financial advice. Laws, regulations and lending products are changing daily and decisions as to whether or how to use this information and/or what actions to take are solely those of the employer. The providers of this information disclaim any and all responsibility and liability for its accuracy, completeness or fitness for your particular business purposes.