S-Corp Shareholders and Unemployment Insurance

Many corporation officers find it surprising that even though they are "owners" of a company, they still may be subject to paying unemployment insurance (UI) premiums and taxes on the wages that they paid to themselves. This is true for shareholders of an S corporation in particular, as they are considered both shareholders and employees of the corporation. Any W-2 income a shareholder receives is considered employee compensation subject to the taxation rules shared by other employees.

In terms of federal income tax withholdings for S-corporation employees, shareholders, and corporate officers, the IRS says:

When corporate officers perform a service for the corporation and receive or are entitled to payments, those payments are considered wages.
The fact that an officer is also a shareholder does not change this requirement. Such payments to the corporate officer are treated as wages. Courts have consistently held S corporation officers/shareholders who provide more than minor services to their corporation and receive, or are entitled to receive, compensation are subject to federal employment taxes.
If an officer does not perform any services or only performs minor services and is not entitled to compensation, the officer would not be considered an employee.

Colorado, just like other states, follows the FUTA (Federal Unemployment Tax Act) definitions for officer wages. The following excerpt is from the Colorado Department of Labor & Employment (CDLE) FAQ, "Are corporations liable to pay unemployment insurance premiums on corporate officer's wages?"

Yes. Corporate officers are considered to be employees of the corporation and their wages are chargeable along with any other remuneration in lieu of wages such as dividends ("S" corporation only), bonuses, draws, or distributions.

In another FAQ answer, CDLE further explains the reasoning for corporation officers to pay UI premiums:

Officers and shareholders of a corporation who perform services for the corporation are considered employees of the corporation. The IRS has established that a reasonable wage should be reported. Therefore, in lieu of any wages being reported, all draws, dividends, distributions and constructive receipt of remuneration can be reclassified to wages.

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.

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