Why S Corp Officers Require Payroll

As a starting point the IRS considers corporate officers who perform a service for the corporation and receive/entitled to payments as employees. The IRS considers those payments as wages subject to employment taxes including Federal withholding, Social Security, Medicare & in Colorado withholding and unemployment taxes even when shareholders take distributions, dividends or other forms of compensation instead of wages. 

There are various court cases the IRS references that support the IRS's s-corp officer/employee viewpoint. In many of those cases, the shareholders failed to report any wages from their S corporations. These court cases origin of why many CPA's will advise their clients to pay themselves a reasonable compensation/W2 wage/salary.  To comply, an s-corp must register in their state as an employer and become subject to payroll reporting requirements such as 941's, 940s, CO-UITRs, CO-1093 & W2s/W3s.

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