3 types of payroll taxes for S corporation owners

Every S corporation owner must pay herself reasonable compensation for the work she performs in her business. That means you are both an owner and an employee of your business.

As an owner, you take distributions of cash, funded by operating profits, from your business. This is your reward for owning a profitable business. The distributions reduce your equity in the business, so the business does not deduct these distributions, but they also are not subject to payroll or self-employment taxes.

As an employee, you earn a salary. This is your compensation for performing work for the business. The business deducts the cost of your salary, which includes both your net (take-home) pay and payroll taxes.

Payroll taxes include the following:

• Social Security The employee (you) pays 6.2% of your salary, which is withheld from your gross pay. The employer (your business) matches with 6.2%. Only the total annual salary paid below a limit is subject to these taxes, and the amount is adjusted each year for inflation. The 2022 limit is $147,000.
• Medicare The employee (you) pays 1.45% of your salary, which is withheld from your gross pay. The employer (your business) matches with 1.45%. There is no limit on the salary amount subject to Medicare tax.
• Unemployment Both the federal and state governments impose unemployment taxes. Only the employer (your business) pays this (although a few states and localities impose an employee-paid unemployment tax). These usually amount to about 6% of the first $7,000 salary paid (or $420) per employee per year.

NB If you are self-employed but do not have an S corporation (you either are a sole proprietor and file a Schedule C with your individual tax return, or you are a general partner in a partnership), your net income from that business is entirely subject to self-employment tax, which includes both Social Security and Medicare, but not unemployment, taxes.