Making the S-Corp election was smart—but now you're facing the reality of payroll requirements. If you're running payroll through your S-Corp and paying yourself a token salary to dodge tax, the IRS is watching and auditing. Here's how to set up compliant payroll that maximizes your tax savings without triggering red flags.
Why S-Corp Owners Must Run Payroll
Unlike LLC owners who can simply take draws, S-Corp owners who work in their business are considered employees. The IRS requires you to pay yourself a "reasonable salary" subject to payroll taxes before taking any distributions.
The Legal Requirement:
- S-Corp owners who provide services must be on payroll
- Salary must reflect "reasonable compensation"
- Payroll taxes must be withheld and deposited
- Quarterly and annual payroll tax returns required
Determining Your "Reasonable Salary"
The IRS has increased audit pressure on S-Corps misclassifying owner salaries. Your salary should reflect what you'd pay an employee doing similar work in your geographic area.
Factors the IRS Considers:
- Compensation paid by similar businesses for similar services
- Your qualifications, experience, and time devoted
- Local economic conditions and cost of living
- Size and complexity of your business
- Your role in generating company income
Personal Trainer Salary Guidelines:
- Entry-level trainers: $35,000-$45,000
- Experienced trainers: $45,000-$65,000
- Specialized/celebrity trainers: $65,000-$85,000
- Adjust for high-cost areas (add 20-30%)
Setting Up Your Payroll System
Step 1: Obtain Required IDs
- Federal Employer Identification Number (EIN)
- State employer registration
- Workers' compensation account (if required)
- Unemployment insurance account
Step 2: Choose Payroll Frequency
- Monthly: Simplest for S-Corp owners
- Bi-weekly: More typical business practice
- Weekly: Highest administrative burden
Step 3: Calculate Payroll Taxes - Your payroll taxes will include:
- Federal income tax withholding
- Social Security tax (6.2% employee + 6.2% employer)
- Medicare tax (1.45% employee + 1.45% employer)
- State income tax withholding (varies by state)
- State unemployment tax (employer only)
- Federal unemployment tax (employer only)
Payroll Processing Options
Option 1: DIY with Software
- Cost: $20-$50/month
- Popular options: QuickBooks Payroll, Gusto, ADP
- Pros: Lower cost, full control
- Cons: Time-consuming, compliance risk
Option 2: Full-Service Payroll Company
- Cost: $40-$100/month
- Services: Complete payroll processing and tax filing
- Pros: Hands-off, compliance protection
- Cons: Higher cost, less control
Option 3: Accountant-Managed Payroll
- Cost: $75-$150/month
- Best for: Integrated tax planning approach
- Pros: Strategic guidance, complete compliance
- Cons: Highest cost
Quarterly Payroll Tax Obligations
Form 941 (Quarterly)
- Due: April 30, July 31, October 31, January 31
- Reports wages paid and taxes withheld
- Must be filed even if you had no payroll activity
Federal Tax Deposits
- Monthly depositors: 15th of following month
- Semi-weekly depositors: 3-5 business days after payroll
- Penalties for late deposits are severe
State Requirements
- Quarterly wage reports
- Unemployment tax payments
- State income tax deposits
Year-End Payroll Requirements
Forms W-2 and W-3
- W-2 to employee (you): By January 31
- W-2 copy to Social Security Administration: By January 31
- Form W-3 (transmittal): By January 31
Form 940 (Annual Federal Unemployment)
- Due: January 31
- Reports FUTA wages and tax
Common S-Corp Payroll Mistakes
Mistake 1: Salary Too Low
- Paying minimum wage to maximize distributions
- IRS will reclassify distributions as wages
- Penalties and interest on unpaid payroll taxes
Mistake 2: Irregular Payroll
- Taking salary only at year-end
- Quarterly salary payments
- IRS expects regular, consistent payroll
Mistake 3: Missing Payroll Tax Deposits
- Federal penalties start at 2% for late deposits
- Can reach 15% for severely delinquent deposits
- Trust fund recovery penalty applies personally
The Distribution Strategy
Once you've paid your reasonable salary, remaining profits can be taken as distributions without self-employment tax.
Example: $90,000 Annual Profit
- Reasonable salary: $55,000
- Payroll taxes: $8,415 (employer + employee)
- Distributions: $35,000 (no additional payroll tax)
- Tax savings vs. LLC: $5,355
Seasonal Considerations for Personal Trainers
Many trainers have seasonal income fluctuations. Consider:
- Consistent monthly salary regardless of revenue
- Larger distributions during busy seasons
- Smaller distributions during slow periods
- Maintain detailed records justifying salary decisions
Professional Setup Recommendations
The complexity of S-Corp payroll compliance makes professional setup crucial. Key considerations:
Initial Setup Requirements:
- Proper payroll system selection
- State and federal registrations
- Reasonable salary determination
- Compliance calendar creation
Ongoing Management:
- Regular payroll processing
- Tax deposit scheduling
- Quarterly return filing
- Year-end reporting
Red Flag Avoidance
The IRS added over 200 agents in 2025 to review "reasonable compensation" claims. Avoid these audit triggers:
- Zero or minimal salary with large distributions
- Salary significantly below industry standards
- Inconsistent payroll patterns
- Missing payroll tax filings
- Late tax deposits
Ready to set up compliant S-Corp payroll that maximizes your tax savings? Our payroll services are specifically designed for fitness professionals who want professional payroll management without the complexity. We handle everything from setup to year-end reporting, ensuring perfect compliance while you focus on training clients. Contact us to get started!
