Setting Up Payroll and Retirement for an S-Corp: Timing, Forms, and Costs

Stop guessing — set up S‑Corp payroll and retirement right the first time

Electing S‑corp status fixes many tax and distribution problems — but it introduces an urgent new obligation: you must run payroll for owner‑employees, withhold and deposit payroll taxes on schedule, and pick retirement plans that play nicely with W‑2 compensation. Miss timing, pick the wrong plan, or skip proper deposits and you’ll face penalties, interest, and IRS scrutiny. This guide gives a step‑by‑step roadmap for what to do after your S‑corp election (and what to do first), including key forms, withholding rules, deadlines, and realistic cost ranges for 2026.

Topline (most important actions first)

• Get an EIN tied to the S‑corp entity — you need it for payroll and retirement plans.
• Open a business bank account and separate owner distributions from payroll.
• Put owner‑employees on payroll and pay a reasonable salary before taking distributions.
• Register for federal and state withholding + unemployment and decide on payroll deposit schedule.
• Choose and adopt a retirement plan that fits headcount and cash flow (Solo 401(k), SEP, SIMPLE, or a full 401(k)).
• Document everything: compensation policy, payroll schedules, plan adoption documents, and meeting minutes.

Why timing matters in 2026

Recent administrative trends through late 2025 and early 2026 make timing more important than ever. The IRS and state agencies continue to increase electronic filing requirements and automated enforcement tools. The IRS has emphasized reasonable‑compensation enforcement for S‑corps, and more states have expanded automatic retirement programs for small employers — meaning if you don’t offer a qualified plan, you may be enrolled in a state program and face compliance headaches. In practice, that means you should move on payroll and retirement fast after the S‑corp election to show clear compliance and avoid overlapping mandates.

Step 1 — EIN, bank account, and entity housekeeping (Day 0–7)

1. Apply for (or confirm) an EIN for the S‑corp. If you formed an LLC and then elected S‑corp status for tax treatment, make sure the EIN reflects the corporate entity that will employ people. Use the IRS online EIN application; you typically get an EIN immediately.
2. Open a dedicated business bank account. Payroll should run through the business account — never mix distributions or owner personal accounts.
3. Confirm state registrations for payroll withholding, state unemployment insurance (SUI), and new‑hire reporting. Each state has different forms and timing; register as an employer before your first payroll.

Step 2 — Put owner‑employees on payroll and set reasonable compensation (Week 1–4)

One of the most common mistakes for new S‑corps is paying owners only via distributions and failing to run payroll. The IRS expects S‑corp owners who provide services to the company to receive reasonable compensation in the form of wages.

What is reasonable compensation?

• There’s no single formula — the IRS looks at duties performed, hours worked, geographic market pay, company size, and comparable wages for similar roles.
• Document how you calculated salary: market data, job descriptions, and a short memo that links duties to the chosen salary.
• Expect increased examiner focus: in 2025–2026 the IRS signaled stronger audits where owners understaff payroll to avoid payroll taxes.

Payroll logistics for owner‑employees

• Classify owner as an employee (W‑2) for payroll purposes.
• Collect Form W‑4 from the owner and any other employees for federal withholding.
• Pay via regular payroll runs (monthly, biweekly, or semi‑monthly) and withhold employee FICA (Social Security & Medicare) plus federal income tax; the company must match employer FICA and pay unemployment taxes.

Step 3 — Federal payroll tax returns and filing deadlines

Key federal forms you’ll encounter:

• Form 941 — Employer’s Quarterly Federal Tax Return. Filed quarterly by the last day of the month after the quarter (April 30, July 31, October 31, and January 31). Use this to report wages, withheld federal income tax, and both employer and employee Social Security and Medicare taxes.
• Form 944 — Annual Federal Tax Return for Employers. Small employers may qualify (IRS notice). If eligible, Form 944 replaces quarterly 941s and is filed once a year.
• Form 940 — Employer’s Annual Federal Unemployment (FUTA) Tax Return. Typically due January 31 for the prior year.
• Form W‑2 and W‑3 — W‑2s to employees and W‑3 to SSA, due January 31 of the following year.

Deposit schedules and lookback rules

Payroll tax deposit frequency (monthly vs semiweekly) is set by IRS lookback periods based on your prior tax liability. If you reported less than $50,000 in the lookback period, you’ll likely have monthly deposits; otherwise you’re on a semiweekly schedule. Deposits must be timely — missed or late deposits trigger penalties and interest. Use an automated monitoring approach to avoid surprises; observability and cost control practices apply to payroll just like they do to modern platforms.

Step 4 — State and local payroll obligations

Don’t forget state withholding and unemployment taxes — these vary widely. Register with your state’s workforce agency for SUI and with the tax agency for withholding. Also remember local payroll taxes or occupational fees in some jurisdictions.

Step 5 — Choose a retirement plan (timing, tax benefits, and which plan fits)

Most S‑corp owner decisions hinge on two things: the number of people you’ll cover and the timing of contributions.

Common plan options and practical timing

• Solo (One‑participant) 401(k)
  • Best for owner(s) with no employees (other than a spouse).
  • Employee salary deferrals must generally be set up by December 31 of the plan year to defer that year’s salary; however, employer contributions (profit‑sharing) are often allowed up to the business tax filing deadline, including extensions, if the plan document permits.
  • By 2026 many payroll providers offer one‑click integrations to route deferrals automatically, reducing errors.
• SEP IRA
  • Simple to set up and administratively light — employers contribute based on W‑2 wages.
  • You can establish a SEP up to the business tax filing date (including extensions) and still fund a prior year contribution — useful for late decisions.
• SIMPLE IRA
  • Good for small employers with a small number of employees; deadline to set up for a calendar year is generally October 1.
  • Has mandatory employer contribution rules (match or non‑elective contribution).
• Traditional 401(k) with ADP/ACP testing
  • Best for multiple employees or when you want higher contribution limits and company matching.
  • Requires plan adoption (preferably before year‑end) and ongoing recordkeeping; automated payroll integrations are increasingly standard in 2026.

How S‑corp W‑2 wages affect retirement contributions

For S‑corp owner contributions, retirement limits are based on W‑2 compensation, not net self‑employment income. That’s advantageous: owner‑employees who pay themselves a reasonable salary can make both employee deferrals (via payroll) and employer contributions, both deductible to the S‑corp (subject to plan rules).

Filing and reporting for retirement plans

Retirement plans have separate reporting — for example, most 401(k) plans will eventually require Form 5500 filings depending on plan size and type. Solo 401(k) plans often avoid 5500 until plan assets exceed a regulatory threshold or a participant count change occurs. Work with a plan advisor or TPA to confirm filing rules for your chosen plan.

Step 6 — Integrate payroll and retirement: practical setup steps

1. Choose payroll software/provider that supports retirement deferrals (strip down tools and pick an integrated vendor). In 2026, integrated payroll + retirement offerings reduce errors and save filing time.
2. Adopt formal plan documents — a prototype or custom plan must be signed and dated with an effective adoption date.
3. Set up deferral elections via payroll so employee deferrals are withheld each pay period and remitted to the plan trustee promptly (within plan limits).
4. Schedule employer contributions (matching or profit‑sharing) and ensure accounting entries reconcile payroll and plan payments.
5. Document employer contributions on the company books and in board/shareholder minutes.

Costs — what you should budget for

Costs vary by provider and plan complexity. Typical ranges in 2026:

• Payroll software: $25–$200 per month base + $4–$10 per employee per month for small business tiers. Full‑service payroll services commonly run $50–$300/month + per‑employee fees.
• Payroll tax deposits and filing: Usually included with full‑service providers; doing it yourself increases your risk and administrative burden.
• Retirement plan setup: Solo 401(k) setup often $0–$150 (some providers free), SEP IRA setup free with many custodians; small 401(k) sponsor packages often start $500–$2,000 initial setup depending on recordkeeping needs.
• Annual recordkeeping/TPA fees: $200–$2,000+ depending on plan size and whether nondiscrimination testing is required.
• Advisory/accounting: Expect at least a few hundred dollars to consult on reasonable compensation and plan selection — many accountants bundle this into their tax prep packages.

Common pitfalls and how to avoid them

• Waiting to run payroll after the S‑corp election. Start payroll by the first pay period after the tax status change to avoid retroactive penalties.
• Using distributions instead of wages. Document and pay reasonable compensation first; use distributions for profit after payroll.
• Failing to set up retirement deferrals in payroll. Employee deferrals must be withheld from wages — don’t try to “book” deferrals outside payroll.
• Mixing accounts. Keep payroll, plan assets, and distributions separated in accounting and banking.
• Ignoring state auto‑IRA programs. If you don’t sponsor a compliant plan, your employees may be enrolled in a state program — check state deadlines.

Practical tip: In 2026, choose a payroll provider that natively integrates with your chosen retirement custodian. The time saved reconciling deferrals and avoiding late deposits usually pays for any small price premium.

Documentation and compliance checklist (actionable)

1. Obtain and confirm S‑corp EIN.
2. Open business bank account dedicated to payroll.
3. Register for federal (EIN) and state withholding and unemployment accounts.
4. Decide payroll frequency and register for deposit schedule with IRS lookback rules in mind.
5. Collect W‑4 and I‑9 for owner and employees; create employee files.
6. Create a written reasonable‑compensation policy and save supporting market data.
7. Choose a retirement plan; sign adoption documents before critical dates.
8. Integrate payroll with retirement vendor for automatic deferrals and contributions — consider vendors with strong API and integration support to reduce reconciliation work.
9. Set up accounting entries to reconcile payroll liabilities and plan deposits monthly.
10. File Form 941 (quarterly) or Form 944 (annual) as required, and Form 940 annually.
11. Distribute W‑2s and file W‑3 by January 31 each year.
12. Confirm state new‑hire reporting and workers’ compensation coverage.

Case study: Small digital agency (realistic example)

Scenario: Mia converts her single‑owner LLC to an S‑corp in January 2026. She obtains an EIN, opens a business checking account, and registers for state withholding. Using salary data for her role (creative director) she sets a reasonable salary of $72,000 and runs biweekly payroll through an integrated payroll + retirement provider. She sets up a Solo 401(k) by December 31 to capture employee deferrals and makes an employer profit‑sharing contribution by her tax filing date. Result: Mia reduces payroll tax leakage on distributions, captures $22k+ in annual retirement savings, and maintains clean documentation that would stand up in an IRS review.

Future‑proofing: 2026 strategies and predictions

• Integrated tech wins. Expect more bundled payroll + retirement offerings with lower setup friction in 2026. Pick vendors who support API integrations and real‑time reporting.
• State auto‑IRA expansion. Several states continue to broaden programs; employers should proactively offer qualified plans to avoid being subject to state mandates.
• Increased scrutiny on reasonable compensation. Maintain written policies and contemporaneous documentation. Use market salary data and independent surveys where possible.
• Automated compliance monitoring. Use software that flags deposit schedule changes (monthly → semiweekly) and tracks lookback period thresholds — borrow observability techniques from modern ops teams (see cost & observability playbooks).

When to call a pro

• If you have multiple owners with varying levels of involvement and compensation. Consider broader issues like founder succession and what payroll means for ownership transitions.
• If you plan to cover employees under a retirement plan and want to optimize nondiscrimination testing.
• If you need to catch up on missed payroll deposits or correct prior W‑2s; penalties and interest may be negotiable but require professional help — and you may need to prepare documentation in case of a dispute (see resources on how to prepare if an employee files a claim).

Quick reference: Key forms and deadlines

• Form 941 — Quarterly, due last day of month after quarter (Apr 30, Jul 31, Oct 31, Jan 31).
• Form 944 — Annual (for eligible small employers) — follow IRS determination.
• Form 940 — Annual FUTA — generally due Jan 31.
• Form W‑2/W‑3 — Employee wage reporting — W‑2s due Jan 31; file with SSA by Jan 31.
• State withholding and SUI — state deadlines vary; register before first payroll.

Final actionable checklist (what to do in the first 30 days)

1. Confirm EIN and open business bank account.
2. Register for state withholding and unemployment accounts.
3. Choose payroll frequency and provider that integrates with retirement options — run a quick tool audit to strip underused tools and keep costs predictable.
4. Set owner reasonable salary; begin payroll and withhold taxes immediately.
5. Decide on retirement plan and adopt plan documents (Solo 401(k), SEP, SIMPLE, or 401(k)).
6. Document compensation policy and save all adoption signed documents.

Closing: Your next move

Getting payroll and retirement right for your S‑corp is a mix of timing, documentation, and the right vendors. Start with an EIN and a bank account, put a reasonable salary on payroll, register with state and federal agencies, and adopt a retirement plan that fits your headcount and cash flow. These steps protect you from penalties, let you maximize retirement contributions, and position your business for growth.

Ready for a no‑fluff checklist and vendor comparison? Download our S‑Corp Payroll & Retirement Setup checklist or schedule a 20‑minute call with one of our formation specialists to map your payroll frequency, retirement plan selection, and realistic cost estimate for 2026.

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