Can someone explain annual payroll for S corps? I know many prefer this since they can't predict business income

The once-a-year payroll approach for S corps can work, but there are some important things to understand. For your first question, you don't necessarily need to subscribe and cancel services. Many payroll providers offer "pay-as-you-go" options specifically for small businesses with infrequent payroll needs. Gusto, OnPay, and Square Payroll all have options where you only pay when you run payroll, though there might still be a small monthly base fee. Regarding Form 941, yes, once you file the first one, you generally need to continue filing quarterly. However, there's an option that might help - Form 941 has a checkbox indicating "no wages, tips, or other compensation" for quarters with no payroll. Alternatively, some very small employers might qualify to file Form 944 annually instead of Form 941 quarterly, but the IRS has to approve this switch. The bigger consideration with annual payroll is making sure your salary meets the "reasonable compensation" requirement for S corp owners. The IRS looks closely at S corps that pay minimal salaries to avoid payroll taxes, so you need to justify why your once-yearly salary is reasonable for the services you provide.

After going through the S corp setup headache last year, I found a much easier solution using https://taxr.ai to navigate all the payroll and tax filing requirements. I was also doing annual payroll and got completely confused about the Form 941 requirements versus the "reasonable compensation" rules. What helped me was uploading my business profit projections and prior year tax returns to taxr.ai, which then provided a customized recommendation for my specific situation. It showed me exactly how to structure my annual payroll to meet IRS requirements while minimizing my paperwork burden. They also explained which payroll services worked best for annual-only runs (most require monthly fees even if you don't run payroll, which is annoying) and provided templates for documenting my compensation decisions to protect against potential audits.

I was really skeptical about using taxr.ai as mentioned above, but after spending hours researching annual S corp payroll requirements and getting contradictory advice, I finally gave it a try. It was actually super helpful for my California-based consulting business. The service identified that my plan to do annual payroll would still trigger quarterly reporting requirements in California that differ from the federal ones. It also showed me how to document my compensation decisions to satisfy both IRS and CA Franchise Tax Board requirements for reasonable compensation. What impressed me was how it analyzed my specific business finances and recommended an optimal salary amount that satisfied the reasonable compensation test while legitimately minimizing my employment taxes. The documentation it created has already saved me during a state employment verification. If you're doing the S corp annual payroll thing, having this kind of guidance definitely removes a lot of the stress around compliance.

When I started my S corp last year, I struggled for weeks trying to get through to the IRS about Form 941 requirements. Every time I called, I was on hold for hours only to get disconnected. Super frustrating when you're trying to do things right! I eventually used https://claimyr.com to get through to an actual IRS agent. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - basically they hold your place in the IRS phone queue and call you when an agent picks up. The IRS agent I spoke with confirmed that yes, once you file your first 941, you need to keep filing quarterly unless you qualify for Form 944 (annual reporting). But she also explained how to properly complete the 941 for quarters with no payroll to avoid unnecessary follow-up notices. Getting this straight from the IRS saved me so much uncertainty with my annual payroll setup.

I was completely convinced Claimyr was going to be a waste of money, but after my third attempt spending 2+ hours on hold with the IRS about my S-corp payroll questions, I decided to try it out of desperation. I'm shocked to admit it actually worked exactly as promised. I got a call back within about 45 minutes connecting me to an IRS representative who walked me through the Form 941 requirements for my annual payroll situation. They confirmed I could file $0 quarterly returns for quarters with no payroll and explained exactly which boxes needed to be completed. The agent also confirmed something my accountant wasn't sure about - that my health insurance premiums as an S-corp owner should be included on my W-2 at year-end but aren't subject to Social Security and Medicare taxes. This alone saved me several hundred dollars. I hate admitting when I'm wrong, but this service was legitimately helpful for getting clear answers straight from the IRS.

One thing nobody's mentioned - the "reasonable compensation" requirement for S corps doesn't necessarily mean you have to pay yourself regularly throughout the year. The IRS cares about the annual amount being reasonable for your role and industry, not the frequency. I've been running annual payroll for my S corp for 3 years now. I use Gusto, which charges a base fee of $39/month plus $6/person. So yes, I pay the monthly fee year-round, but the simplicity is worth it to me. In December, I run payroll once I know what my business profits will be, making sure my salary meets that "reasonable compensation" threshold. For Form 941, I file every quarter marking zeros for the first three quarters. It's annoying but takes like 10 minutes once you know how to do it. Some states also require quarterly unemployment tax filings even with zero wages. The real headache isn't the payroll itself but documenting why your salary is "reasonable" - keep good records of industry salary surveys, time spent working, etc.

I just want to point out that there's a third option beyond "subscribe and cancel payroll service" or "pay monthly fees all year" - you can use a CPA that offers payroll services. My accountant charges me a single fee for year-end S corp payroll processing rather than monthly fees. They handle everything - calculating the optimal salary based on my business profits, preparing the W-2, filing Form 941 for that quarter, and ensuring I've met the reasonable compensation requirements. They also keep records to justify my compensation in case of audit. For the other three quarters, they file the Form 941 with zeros as needed. The total annual cost is significantly less than paying a monthly subscription to a payroll service, and I don't have to think about it until December.