Forgot to Run S Corp Payroll This Year? What to Do Before December 31

It is late in the year, you elected S corp, and no payroll has run. Your CPA is asking about a W-2. There is a December route, and it is better than the alternatives.

Without wages, the IRS can treat your distributions as wages, with the payroll taxes, penalties and interest that follow. Your CPA cannot report a W-2 that does not exist.

• State accounts: open the withholding and unemployment accounts if they do not exist. Some states issue numbers quickly and others take weeks, so this starts first.
• Salary: your CPA sets reasonable compensation for the year as a whole.
• One payroll run: the year's salary paid in a single December payroll, with federal and state withholding and the company taxes calculated on it.
• Deposits: the taxes on that run are deposited on the schedule that applies to it.
• Returns: quarterly returns for the quarters with no wages are filed, and the fourth-quarter returns carry the year's wages.
• W-2 and W-3: issued to you and filed with the SSA by January 31.

Penalties depend on which filings were due and when. The IRS rates are public:

• Failure to file a return: 5% of the unpaid tax for each month or part of a month, up to 25%.
• Failure to deposit: 2% at 1 to 5 days late, 5% at 6 to 15 days, 10% beyond 15 days. It rises to 15% when still unpaid 10 days after the first IRS notice.
• Interest: charged on top of both until paid.

A late return showing no wages carries no tax, so the percentage penalty on it is zero. The penalties that matter attach to the quarter the December run lands in, if its deposits or returns are late.

Put the salary on a monthly schedule starting in January. Twelve small runs are easier to keep current than one large one, and the deposits never pile up.