How to Set Up Payroll: The Step-by-Step Guide for S Corp Solopreneurs

Establishing payroll as an S Corp solopreneur isn't just about checking off compliance boxes; it's a savvy strategy that empowers you to save thousands by expertly balancing your income between salary and distributions. Let automated payroll platforms take the wheel, streamlining withholdings, filings, and compliance, while freeing up your valuable time and sidestepping costly mistakes. 

Running payroll as an S Corp solopreneur isn’t just about compliance; it’s a strategy that can save you thousands. By splitting income between salary and distributions, you unlock tax advantages that sole proprietors simply don’t have access to. That shift can mean $8,000+ in savings on a $100,000 income.

What feels like complexity at first, getting an EIN, registering for state accounts, and setting up withholdings, is actually the foundation of a smarter compensation system. When it’s set up the right way, payroll turns from a routine task into a tax optimization engine.

Don’t leave payroll to trial and error. Lettuce calculates a compliant and defensible salary, automates every filing, and keeps your salary split optimized in real-time. Get started today and unlock tax savings without the stress.

Setting Up Your S Corp Payroll: Step-by-Step Roadmap

Payroll setup looks straightforward from the outside. But once you dig in, it’s a maze of state registrations, withholdings, quarterly filings, and salary rules that the IRS doesn’t define clearly. Each piece matters, and mistakes can mean lost tax savings or compliance headaches down the road.

Step 1: Get Your EIN

Your Employer Identification Number (EIN) is your business’s Social Security number, and you’ll use it on every payroll filing and tax report. Applying online with the IRS only takes a few minutes, and once issued, your EIN becomes the foundation for every payroll and tax-related task you’ll handle moving forward.

Step 2: Register for State Payroll Accounts

Most states require payroll tax accounts for state income tax withholding (SIT) and unemployment insurance (SUTA). Without these, you can’t legally run payroll. Check your state’s Department of Revenue or labor website, and make sure to store your account credentials securely; you’ll use them frequently for filings and payments.

Step 3: Open a Dedicated Business Bank Account

Mixing payroll (and other business expenses) with your personal finances creates messy records and potential IRS red flags. A dedicated business bank account ensures all of your business transactions, including payroll funds, tax withholdings, and payments, are clearly tracked. It also helps you set aside money for taxes in advance, so you’re never caught off guard by a quarterly deadline.

Step 4: Classify Yourself and Any Workers Correctly

As an S Corp owner, you’re both an employee and a shareholder. That means you must pay yourself a W-2 salary for your work, while any profit left over can be taken as distributions. If you hire contractors, they’re classified differently and require 1099 reporting instead of W-2. Getting classification right from the start avoids costly corrections, penalties, or back taxes.

Step 5: Gather Payroll Information

Even if you’re your only employee, you still need a basic personnel file. Include your legal name, Social Security number, address, direct deposit details, and tax forms (W-4 for employees, W-9 for contractors). If you bring on part-time or project help later, having a consistent system for collecting this information keeps you compliant and organized.

Step 6: Determine Your Reasonable Salary

The IRS requires you to pay yourself a “reasonable salary,” but it never gives you a formula. That’s where most solopreneurs stumble; some pay themselves too much and lose tax savings, while others underpay and risk an audit. Copying rules of thumb like “50% of profits” won’t cut it if the IRS takes a closer look.

The right number depends on your role, your industry, and your business’s income. For example, if your S Corp earns $100,000, paying yourself $60,000 and taking $40,000 in distributions saves about $6,120 in payroll taxes compared to a full salary. But it’s not about picking a random split. It’s about choosing a defensible salary.

Lettuce does more than suggest a number. Lettuce calculates a salary the IRS can’t argue with, documents it for audit defense, and adjusts automatically as income changes.

Step 7: Choose Your Payroll Schedule

Your payroll schedule determines how often you run paychecks. Many solopreneurs opt for monthly payroll because it’s simple; however, some states require biweekly or semi-monthly schedules. Consider your cash flow and state rules, then stick to your choice consistently.

Automating payroll runs according to your chosen frequency ensures you never miss a payday or filing deadline.

Step 8: Pick a Payroll System and Start Running Payroll

Running payroll involves more than just transferring money to yourself. You’ll need to withhold federal income tax, Social Security, and Medicare, file quarterly Form 941 and annual Form 940, and issue yourself a W-2 at year-end. Add state filings if applicable, and the process can quickly become overwhelming. Manual payroll often takes two to five hours per pay period, leaving ample room for errors.

Lettuce handles your payroll end-to-end, including calculating withholdings, filing IRS and state forms, generating pay stubs, and maintaining audit-ready records. Compliance is automatic, leaving you free to focus on growth.

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Ongoing Payroll Best Practices for S Corps

Payroll isn’t something you set up once and forget. As your income changes, your salary and distribution split may need adjusting to stay compliant and maximize savings. Reviewing your setup quarterly helps you stay ahead of IRS standards, while automation ensures these adjustments are made in real time.

Staying on schedule, filing on time, and keeping meticulous records turns payroll from a compliance headache into a system that protects your tax savings and grows with your business.

Here are a few habits that keep you compliant year-round:

• Run payroll on time, every time. A consistent pay schedule keeps you IRS-compliant and ensures your compensation records are airtight. Late or irregular payroll runs are one of the easiest red flags for auditors.

• File and deposit payroll taxes before deadlines. Federal deposits (Form 941 and Form 940) and state filings all carry penalties if you miss due dates. Automated platforms can sync with IRS and state timelines so you never fall behind.

• Maintain clean payroll records. Keep copies of pay stubs, W-2s, and all tax filings for at least three years, though some situations require keeping them longer. Solid records protect you in the event of an audit and make year-end filings seamless.

• Review your salary split quarterly. Income can fluctuate, and what was “reasonable” six months ago might not be accurate today. Regular check-ins ensure you’re maximizing savings while staying compliant.

Frequently Asked Payroll Setup Questions for S Corp Solopreneurs

Smart S Corp solopreneurs ask strategic questions that turn payroll setup from a compliance task into a tax optimization advantage. These are the most common questions business owners ask when transforming their financial strategy.

How Do I Determine a Reasonable Salary for Myself as an S Corp Owner?

The IRS requires you to pay yourself a fair salary that reflects the work you perform. Use industry pay data and your actual role, duties, time, and skills to determine reasonable W-2 wages. Recommended percentage splits are only a starting point.

What Payroll Taxes and Filings Do I Need to Handle as a Solo S Corp Business Owner?

On your salary, you’ll withhold federal income tax, Social Security (6.2%), and Medicare (1.45%), along with any state taxes. The corporation, as your employer, must also pay a matching 7.65 % in FICA taxes and cover Federal Unemployment (FUTA) tax. The S Corp files quarterly Form 941, an annual Form 940 for unemployment, and issues W-2s at year-end.

How Can I Split My S Corp Income Between Salary and Distributions to Maximize Tax Savings?

Only your salary is subject to the 15.3% employment tax, while distributions avoid it. For example, paying yourself $60,000 and taking $40,000 in distributions on $100,000 profit can save around $6,000 annually in payroll taxes.

What Are the Step-by-Step Payroll Setup Requirements for a One-Person Business?

Start by getting an EIN, registering for state payroll accounts, and opening a business bank account. Then, classify yourself as both an employee and a shareholder, gather your information, and choose a payroll schedule before processing your first paycheck.

How Often Should I Revisit and Adjust My Salary/Distribution Split for Ongoing Compliance and Optimization?

Review your salary quarterly or whenever your income changes significantly. Regular adjustments ensure you remain compliant with IRS standards and help you maximize your tax savings over time.

Unlock S Corp Advantages: Automate Payroll and Maximize Your Earnings

Setting up payroll is the turning point where your S Corp becomes more than a tax election; it becomes a working system. Done right, payroll lays the foundation for compliance, accurate records, and meaningful tax savings.

The steps can feel technical at first, from getting an EIN to choosing your salary and registering state accounts. But once in place, payroll runs on a steady rhythm that saves time, reduces risk, and positions you to keep more of what you earn.

Lettuce turns payroll into a working system from day one; your filings, salary splits, compliance, and real-time adjustments are handled automatically. Ready to set up payroll the smart way and protect your tax savings? Get started today.