S-corp owner payroll: what to fix before 31 December

Box 1 of a W-2 shows the wages you paid the employee during the year. Payroll tax deposits follow the same date: the liability arises when wages are paid.

So a salary meant for 2026 that is run on 4 January is 2027 wages, whatever period it was meant to cover. Anything that has to be in the 2026 wages has to be paid by 31 December 2026.

An S-corp has to pay a shareholder who works in the business reasonable compensation for that work before it makes non-wage distributions. The Form 1120-S instructions say distributions and other payments to a corporate officer must be treated as wages to the extent they are reasonable compensation for services.

There is no formula. The IRS says the Code and the regulations give no specific guidelines, and the courts weigh factors case by case:

Distributions are tax-free only up to your basis in the stock. Under the Form 7203 instructions, a distribution larger than your stock basis before distributions is reported as a capital gain for the excess.

A shareholder who received a non-dividend distribution files Form 7203 with their return. If the year’s distributions are heading past basis, December is when to notice, not April.

Basis moves with the year’s income, losses and distributions, so it is worth having your accountant confirm the figure rather than estimating it.

When the S-corp pays or reimburses health insurance premiums for a shareholder who owns more than 2%, the premiums are wages for that shareholder. They go in Box 1 of the W-2. If the plan covers all employees or a class of them, they are not subject to Social Security or Medicare tax, so they stay out of Boxes 3 and 5.

The shareholder can then take an above-the-line deduction for the premiums, as long as the coverage was established by the S-corp and the other self-employed health insurance rules are met. It is not available if the shareholder or their spouse was eligible for a subsidised health plan.

The common miss is premiums paid all year and never added to payroll. The last payroll of the year is the place to add them.

Three returns follow the year-end payroll, and in 2027 the usual 31 January date falls on a Sunday. Each set of instructions moves a weekend due date to the next business day.

Federal payroll tax deposits have to be made by electronic funds transfer. Whether they are due monthly or semiweekly depends on your deposit schedule, and the liability arises on the day the wages are paid.

A large December salary therefore brings a large December deposit: the employee and employer halves of Social Security and Medicare, and the income tax withheld. Social Security stops at the 2026 wage base and Medicare does not.

The cash for all of it has to be in the business account before the payroll runs. Moving it from the owner’s personal account afterwards is how December payroll goes wrong.

The IRS has the authority to reclassify distributions to a shareholder as wages, which brings the employment taxes that would have been due on them. The courts have upheld that authority in a line of cases.

Correcting the year inside the year is simpler than correcting it after the W-2s and the fourth-quarter 941 are filed. What the right salary is remains a question for you and your accountant; software cannot give you the number.