Single Owner S-Corp - Employment Tax Questions

3 Replies

My wife just recently formed a corporation in CA and elected S-Corp status with the IRS (via form 2553).  I spent time on the phone with the CA FTB and Employment Development Department, and am still struggling to find the right way forward with our complex circumstances.  I have hired a CPA firm, but was told the remaining questions I have are for Payroll processors or HR experts and not CPAs.

My wife is the sole-owner of the S-Corp, but will also be the sole employee (as she has to pay herself a reasonable salary prior to K-1 profit distribution).  She is also a military spouse, and we are both domiciled in FL so we are exempt from CA income taxes under Military Spouse Residency Relief Act (and as documented in CA FTB 1032).  Despite all of this, she will still be the sole employee of her S-Corp and we are finding out that even though she is exempt from CA withholding and CA taxes, unemployment insurance, and disability insurance, that she still has to create an account with CA and file quarterly and annual tax forms.  

We are in the process of determining all the forms that need to be filed at the CA and Federal level in order to "hire" herself as the sole employee of the company.  We have never hired a payroll company before, and are looking to see if there are any other Single Owner S-Corp owner/employees on BP that can provide us with some guidance and suggestions regarding payroll companies.  

If she is operating the S Corp in CA she is going to most likely be subject to income tax in CA on that income despite her residency with the military. Hire a payroll company to set you up - they are cheap and efficient.

As a Florida resident, she needs to apply for a Florida Unemployment account.  Her S-Corp does not have to create California employment accounts unless or until she hires an employee in (or she moves to) California.  California will ALWAYS tell you that they get to collect taxes (it is there go-to answer, regardless of the question) and while she'll owe California income taxes, she does not owe any California employment taxes.

However, at year end, she will have to file both California and Florida state income tax returns and her personal 1040 will then have to report to California since California has nexus to her business.

I guess my first question is, since you are domiciled in Florida, why did you open the business in California.  It literally has the highest annual corporate filing fees in the nation ($800 per year!)  If there is any way to undo the California filing (your first year's $800 is probably lost) and re-open it in Florida, that may be a better route to go.

I am surprised your CPA firm told you to speak with Payroll processors. A good CPA (or CPA firm) should handle all your payroll tax questions. As a matter of fact, Payroll companies such as ADP or Paychex provide incorrect advice far too often. They are not professionals, so they really shouldn't be giving advice anyways.

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