S Corporation Shareholders and Unemployment

Many find it surprising that even though they are officers or "owners" of a company, they still may be subject to paying unemployment 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.

Colorado, just like other states, follows the FUTA (Federal Unemployment Tax Act) definitions. The following excerpt is from CO-DOL website question 6 under "premiums" section of this FAQ page

Definition of S corporation employees, shareholders, and corporate officers from IRS.gov
"The definition of employee for FICA (Federal Insurance Contributions Act), FUTA (Federal Unemployment Tax Act) and federal income tax withholding under the Internal Revenue Code include corporate officers. 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."