How To Run S Corp Payroll: Steps to Pay Yourself

Payroll is a critical requirement for S Corp owners, ensuring IRS compliance while allowing business owners to take advantage of tax-saving strategies. Paying yourself a reasonable salary through payroll and then taking additional profits as distributions helps avoid penalties and reduces unnecessary self-employment taxes. Automating payroll, tax withholdings, and filings with Lettuce simplifies compliance, keeps finances organized, and gives S Corp owners more time to focus on growing their business.

If you're self-employed, own your own business, or are a contractor who's transitioned into an S Corporation, or are thinking about it, understanding what payroll is and how to pay yourself properly is key. Payroll isn’t just about taking home a paycheck; it also involves complying with IRS guidelines to keep your S Corp running smoothly. Using Lettuce to manage payroll can help you stay compliant with IRS regulations and streamline the process effectively. Follow along in this guide as we explore the fundamentals of payroll management and discover how Lettuce simplifies paying yourself and maintaining your business’s stability.

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Why Does Payroll Matter for an S Corp?

As the owner of an S Corp, understanding how to pay yourself properly is not just a matter of receiving income but also ensuring you comply with the IRS’s rules. Payroll plays a vital function in the effective operation of S Corporations. One of the biggest tax benefits to owning an S Corp is the ability to split your income into two buckets: salary, which is subject to employment taxes, and owner’s distribution, which is not. More on that later.

Many owners ask, “Do I need to run payroll in an S Corp?” The answer is yes. As an owner, you often wear two hats, one as the employer and the other as the employee. The IRS requires that S Corp owners give themselves a fair paycheck; getting this right can help you maximize tax advantages and avoid penalties.

Payroll typically refers to the process of paying employees, which includes calculating gross pay, taxes, and deductions. However, in an S Corporation, it’s crucial to run payroll to ensure you pay yourself a reasonable salary. This helps prevent owners from taking only distributions to avoid employment taxes and facing potential IRS scrutiny.

While the process might seem overwhelming, Lettuce simplifies payroll by automating the distribution of each payment to your S Corp, paying quarterly taxes, and ensuring compliance with IRS regulations, all of which makes it easier to focus on running your business.

How Do I Pay Myself in an S Corp?

As an S Corp owner, you have three ways to pay yourself. Understanding how each one works helps you stay compliant and take advantage of the tax benefits your business structure offers.

1. Salary (W-2 Income)

• This is your regular paycheck for the work you do.

• It’s subject to payroll taxes, including Social Security and Medicare.

• The IRS requires your salary to be reasonable, meaning it should reflect what someone in your position and industry would typically earn.

2. Distributions (Owner’s Draw)

• These are profits paid to you beyond your salary.

• Distributions are not subject to payroll taxes, which can reduce your total tax burden.

• You must still pay yourself a reasonable salary first before taking distributions to stay within IRS rules.

3. Salary + Distributions (Balanced Approach)

• The most common and tax-efficient method for S Corp owners.

• You receive a consistent salary through payroll and take additional profits as distributions when available.

• This approach maintains IRS compliance while keeping your tax obligations lower overall.

How a Reasonable Salary is Determined

The IRS expects your salary to reflect fair market value for your role. Factors include your duties, experience, business profits, and industry averages.

Lettuce takes the guesswork out of this process by analyzing your income, comparing it with industry data, and recommending a salary that meets compliance standards, so you can stay focused on running your business confidently.

Lettuce follows a rule of thumb by automatically allocating a percentage of your income to payroll based on several factors, like projected income, net income, statistical data about your industry, and IRS guidelines to ensure compliance and tax efficiency.

How to Make S Corp Salary Payments to Yourself

Paying yourself through your S Corp isn’t just about writing a check—it’s about following the right steps to stay compliant with IRS rules and maintain accurate records. Here’s how to do it the right way:

1. Set up a Business Bank Account

Your salary must come from your S Corp’s bank account, not your personal one. This separation keeps your business finances clean and shows the IRS that you’re operating professionally.

2. Choose a Payroll System

Using software is the easiest way to stay organized and compliant. Tools like Lettuce automate your payroll setup, handle tax withholdings, and manage filings behind the scenes through its integration with Gusto.

3. Establish Your Payment Schedule

Decide how often you’ll pay yourself; biweekly or monthly are the most common options. Consistency matters. A regular schedule signals that you’re being paid as an employee, not just taking random draws.

4. Calculate Your Withholdings

Payroll taxes must be withheld from each paycheck, including federal income tax, Social Security, and Medicare. Lettuce handles these automatically, so you don’t have to do any manual math or paperwork.

5. Issue pay Stubs and Maintain Records

Every payment should include a pay stub showing gross pay, withholdings, and net pay. These records are essential for IRS reporting and your annual W-2 form.

6. File and Remit Payroll Taxes

Your S Corp is responsible for sending payroll taxes to the IRS and your state on a regular schedule. With Lettuce, this happens automatically—forms, deadlines, and payments are managed for you.

7. Keep Salary and Distributions Separate

If you take both a salary and distributions, make sure they’re clearly tracked. Your salary counts as W-2 income, while distributions come from profits after payroll. Lettuce keeps these separate in your reports, ensuring accuracy for year-end filings.

Step-by-Step Guide to Managing Payroll as an S Corp

Step 1: Determine Your Salary

A reasonable salary is calculated using industry benchmarks, such as your industry experience, and assessing the financial health of your business. You can reference tools like the Bureau of Labor Statistics to find competitive wages in your field.

This process can get complicated, which is why Lettuce simplifies and automates it for you. Lettuce automatically allocates a portion of your income to payroll, based on general IRS guidelines. This ensures compliance and tax efficiency, while also factoring in your business's net income to reflect true profitability. Lettuce is constantly analyzing your business financials to optimize your salary and tax withholdings, striking the perfect balance between compliance and efficiency.

Step 2: Getting Started with Payroll in Lettuce

If you’re managing an S Corp, payroll is essential, and Lettuce makes it simple and effortless. Lettuce's platform guides you through setting up an automated payroll plan, integrating with Gusto behind the scenes for payroll services, with no manual setup required. This ensures you stay on top of both federal and state payroll tax requirements, making compliance and set-up easy and stress-free.

Step 3: Pay Taxes

Running payroll means managing taxes the right way. Every S Corp must withhold and pay several key taxes:

• Federal income tax – Based on your W-4 withholding setup.

• Social Security and Medicare (FICA) – Split between you and your S Corp.

• Federal Unemployment Tax (FUTA) – Paid by your business, not deducted from your paycheck.

• State payroll taxes – Depending on where your business operates.

Lettuce takes care of these automatically. The platform calculates, withholds, and remits payroll taxes for you each pay period. It also handles required forms like IRS Form 941 and state quarterly filings, so you never have to worry about missing a payment or filing late.

You’ll always know what’s being paid, when, and to whom, all while staying fully compliant with IRS and state regulations.

Step 4: Plan for Distributions

You can take distributions as the business profits grow, but it’s crucial to maintain a clear separation between salary and distributions to avoid IRS scrutiny. Lettuce helps automatically balance these two streams without confusion.

How Lettuce Supports S Corp Payroll Needs

Managing S Corp payroll can be complicated, but with Lettuce, it doesn’t have to be. Lettuce was built to make running your S Corp easier by automating the steps that usually take hours of paperwork and guesswork.

Here’s how Lettuce helps you handle payroll the smart way:

1. Automates your reasonable salary: Lettuce calculates a fair, IRS-compliant salary based on your income, industry, and business data. No more second-guessing what counts as “reasonable”, Lettuce keeps you compliant automatically.
2. Runs payroll behind the scenes: Once you’re set up, Lettuce processes your payroll through its Gusto integration. That means accurate paychecks, direct deposits, and automatic tax withholdings, all without manual setup.
3. Handles payroll taxes and filings: Lettuce automatically prepares and submits federal and state payroll taxes, including Social Security and Medicare. You’ll stay up to date with every IRS and state filing deadline, without lifting a finger.
4. Balances salary and distributions: Lettuce helps you maintain the ideal ratio between salary and distributions so you get the best of both worlds, IRS compliance, and optimized tax savings.
5. Keeps everything organized: Every transaction, payment, and filing is tracked in one place. You’ll have clear, audit-ready records without juggling multiple systems or spreadsheets.
6. Saves time for what matters most: Instead of managing payroll yourself, Lettuce keeps it running in the background while you focus on clients, projects, and growth.

With Lettuce, you don’t just stay compliant. You gain back control, time, and peace of mind. Smart, simple payroll for S Corps, done right, every time.

Frequently Asked Questions (FAQs) About S Corp Payroll

These quick answers will help you handle payroll, taxes, and distributions with confidence so you can focus on growing your business.

Does an S Corp have to have payroll?

Yes, it does. If you work for your S Corp, you’re both the owner and the employee. The IRS expects you to take a reasonable salary through payroll before any distributions. This requirement exists because the IRS wants to ensure employment taxes are paid on your earned income. Running payroll isn't optional for working S Corp owners. It’s how you stay compliant and avoid trouble later on.

Can I put myself on payroll in an S Corp?

Absolutely. You can and should. Paying yourself through payroll means you’ll get a regular paycheck, have taxes withheld, and report your income correctly to the IRS, just like any other employee. When you run payroll for yourself, your S Corp withholds federal income tax, Social Security, and Medicare taxes from each payment. You'll receive pay stubs documenting these withholdings and a W-2 form at year-end for your personal tax return.

Can you pay yourself on a 1099?

Nope. The IRS doesn’t allow owners who perform services for their S Corp to pay themselves as independent contractors. You're considered an employee of your own business, not a contractor. Your pay needs to come through payroll as W-2 wages, not a 1099. If you try to pay yourself on a 1099, you risk IRS penalties and could lose your S Corp election entirely.

Does an S Corp pay payroll taxes?

Yes. Your S Corp must handle payroll taxes like Social Security, Medicare, federal unemployment (FUTA), and state unemployment taxes. Some are paid entirely by the company, while others are split between you and your business. For example, Social Security and Medicare taxes are divided equally. You pay half through paycheck withholdings, and your S Corp pays the other half as the employer. It's all part of staying on the IRS's good side and maintaining your S Corp status.

How are distributions taxed?

Distributions don’t have payroll taxes, which is one of the major tax advantages of an S Corp. For income tax purposes, distributions are generally tax-free up to your stock basis (essentially your investment in the company plus retained earnings). Any amounts over your basis are typically taxed as capital gains. The key benefit: while your salary is subject to both income tax and payroll taxes (15.3% for Social Security and Medicare), distributions only face income tax at your personal rate; you avoid that 15.3% employment tax bite entirely.

Do I need payroll software for an S Corp?

While it is not a legal requirement, it is highly recommended. Payroll software keeps you organized, compliant, and stress-free by automating the complex calculations and filing requirements. Without it, you'd need to manually calculate withholdings, track payment schedules, file quarterly forms like the 941, handle state payroll tax filings, and generate W-2s at year-end. Platforms like Lettuce make it simple by automating salaries, filings, and payments so you can focus on running your business, not chasing paperwork.

Pay Yourself Like a Pro with Lettuce

Managing payroll doesn’t have to be complicated. As an S Corp owner, paying yourself a reasonable salary is a must for staying compliant with IRS rules, and Lettuce makes this process easy and efficient.

Explore Lettuce today to automate payroll, maximize your tax benefits, and focus on growing your business without worrying about compliance. If you're not already an S Corp, see how much you could save with our free tax calculator.

For more insights on how S Corps work, how you save, and how Lettuce makes it easy, check out our free recorded event on S Corp 101.