Paying an S-Corp Owner's estimated taxes through their payroll

[DebitThatCreditThis]

I've had a couple coworkers tell me this is possible but I'm struggling to see how.

At their old firms they would pay in the estimated taxes for the S-Corp owner through their payroll. Apparently it was easy and cleaner than sending vouchers.

Ever heard of this?

[Lion]

The owner/employee is on payroll and provides Form W-4 and his state equivalent for his withholding. If he chooses a higher amount of withholding to also cover his non-withheld income, such as Form K-1 pass-through income, investment income, income from a side gig, etc., he could cover his full tax liability via withholding.

One benefit is that w/h is presumed to be w/h equally throughout the year while ES is recorded when paid. You must've prepared returns where the taxpayer had no balance due, but still racked up P&I for underpaid ES during Q1 &/or Q2...

Another benefit is that a person doesn't miss or be late on one or more of his ES payments, if all his liability is met with w/h.

I recommend this method for all my clients who have w/h &/or a spouse has w/h to avoid the downsides of ES. It's useful for ANY taxpayer/taxpayer couple where at least some of their income is as an employee.

[DebitThatCreditThis]

The owner/employee is on payroll and provides Form W-4 and his state equivalent for his withholding. If he chooses a higher amount of withholding to also cover his non-withheld income, such as Form K-1 pass-through income, investment income, income from a side gig, etc., he could cover his full tax liability via withholding.

One benefit is that w/h is presumed to be w/h equally throughout the year while ES is recorded when paid. You must've prepared returns where the taxpayer had no balance due, but still racked up P&I for underpaid ES during Q1 &/or Q2...

Another benefit is that a person doesn't miss or be late on one or more of his ES payments, if all his liability is met with w/h.

I recommend this method for all my clients who have w/h &/or a spouse has w/h to avoid the downsides of ES. It's useful for ANY taxpayer/taxpayer couple where at least some of their income is as an employee.

Thank you for the response. So how do you handle this when estimated payments could fluctuate based on income throughout the year. Are you having the client fill out a W-4 in the beginning of the year with a super high withholding and locking them into that W/H amount? Or do they need to fill out a new W4 every time you want to adjust W/H based on pass through income?

I wonder if you can adjust W/H like that throughout the year or if it goes against some payroll regulations.

[Rapid Robert]

"still racked up P&I for underpaid ES during Q1 &/or Q2"

No penalties(*), just interest charged at a daily rate until the underpayment is paid. The interest rate is far less than credit card rates, and if you have better uses for the money, it might be one of the easiest, cheapest loans you've ever taken.

"miss or be late on one or more of his ES payments"

Sometimes people mis-understand the impact of the ES payment due dates. All they represent is start time of the interest clock on any underpayment, until the day the underpayment is paid. There is no "safe harbor" or special break for people who make 4 equal payments by the ES due dates. The only thing that accomplishes is the ability to use a simplified calculation on Form 2210, nothing more. (the simplified calculation gives the same result as the more complete one).

"to avoid the downsides of ES"

I wonder what you think those are. Estimated payments are far easier and simpler for the taxpayer than filling a W-4, hoping it's accurate, and then waiting for the employer to implement it, then trying to make changes later in the year. With ES, you pay exactly what you want, when you want, no third party involved.

(*) Technically, "addition to tax", but it looks like interest, smells like interest, walks like interest, etc.

[Rapid Robert]

"Are you having the client fill out a W-4 in the beginning of the year"

You are missing the point. Since withholding is treated as being paid evenly throughout the year, you want to get the super high withholding for end of the year (last 4-6 months). By then, you should also have a much better idea of how the year is going income-wise than at the beginning.

What you can't do, however, is write a check to your employer (yourself, in the case of an S-corp owner) and ask them to report it as withholding at the end of the year, that is fraud. In another forum, someone thought they were so clever for doing this. Note this is not the same thing as paying yourself an extra large paycheck from net profits at the end of the year, with increased withholding.

[DebitThatCreditThis]

"Are you having the client fill out a W-4 in the beginning of the year"

You are missing the point. Since withholding is treated as being paid evenly throughout the year, you want to get the super high withholding for end of the year (last 4-6 months). By then, you should also have a much better idea of how the year is going income-wise than at the beginning.

What you can't do, however, is write a check to your employer (yourself, in the case of an S-corp owner) and ask them to report it as withholding at the end of the year, that is fraud. In another forum, someone thought they were so clever for doing this. Note this is not the same thing as paying yourself an extra large paycheck from net profits at the end of the year, with increased withholding.

Another consideration I am curious about - if you bonus yourself at the end of the year and include the estimates as additional W/H, aren't you unnecessarily subjecting that money to S.S. and Medicare tax just for purposes of paying in estimates?

[Lion]

For clients who expect the same or higher income in 2022 than they had in 2021, for example, I use the 100%/110% of last year's tax liability to compute paycheck withholding or ES to keep them in a safe harbor. (Doesn't work as well for income dropping, but you have until April for 1Q payment, so the biz person must know something about his year by then.) Again, the reasoning is to pay evenly if ES, because those four dates count, but to end- load the w/h to meet the current year needs. Don't let Uncle Sam have the w/h sooner; increase w/h the second half or last quarter as your client knows more about how his biz will end.

[TaxGuyBill]

Another consideration I am curious about - if you bonus yourself at the end of the year and include the estimates as additional W/H, aren't you unnecessarily subjecting that money to S.S. and Medicare tax just for purposes of paying in estimates?

If they receive a year-end bonus, it is NOT for purposes of Estimated Taxes; it is because that is part of their "reasonable compensation", which is subject to Social Security and Medicare taxes. Paying Estimated Taxes from the year-end money is just a convenient way of paying income tax.

[Beersheba]

My best recommendation to handle this issue:

Have the S corp declare "dividends" on dates when estimates are due. The amount of these "dividends" should be enough to satisfy the estimated tax requirements of the owner.

These really ARE dividends, even though not taxable as such to the recipients. Being "real" dividends means that the normal charging of retained earnings/financials etc. should reflect as such.

[Rapid Robert]

"Have the S corp declare "dividends" on dates when estimates are due. "

But unlike withholding, that does not directly result in payment of current year anticipated tax liability. The question was about the mechanics of wage withholding vs. making estimated tax payments, not about where the money comes from.

Plus, if there are non-dividend distributions being made, that will definitely require reasonable compensation to the officer/employees, which is where the withholding option comes into play.