Does a corporation have to have employees? No, there is no legal requirement that a corporation has to hire employees.4 min read
Updated November 5, 2020:
Does a corporation have to have employees? No, there is no legal requirement that a corporation has to hire employees. In fact, many corporations will not need employees. If you do decide to hire employees for your corporation, however, there are several tax and reporting requirements with which you must comply.
S Corporations and Employees
An S corporation is a corporation that has made a special Internal Revenue Service tax election. S corporations are not directly taxed and are instead considered pass-through entities, which means corporate profits are taxed on shareholder's personal returns. An S corporation is able to hire employees, but employees are not a requirement.
S corporations get taxed the same as partnerships and sole proprietorships. All three of these entities enjoy pass-through taxation. All profits of an S corporation get taxed on shareholders' annual individual returns. Generally, this leads to a much lower tax burden than a normal C corporation.
If an S corporation chooses to hire employees, the business is subject to a variety of employment-related taxes and payments. In addition to contributions for unemployment insurance, S corporations with employees must pay FICA taxes for Medicare and Social Security. Withholding income taxes from employee wages is also required.
In many cases, S corporations will not have traditional employees, meaning someone that does work in the business for a wage. That said, shareholders that perform work within the company can be treated as employees for tax purposes. In these situations, any dividends given to the shareholder-employee would count as income and be subject to taxation.
If your S corporation has shareholders that do work for the company and you would like to lower your tax burden, you can split their compensation. One half of the shareholder-employee's compensation will be a traditional salary, and the other half will be dividends. Make sure that the salary reasonably compensates the person for their work or else you may face an IRS challenge.
Must Your Corporation Pay Salaries?
After forming your corporation, you are not required to hire employees, which also means you aren't required to pay salaries. As long as your Secretary of State has your Articles of Incorporation and you are maintaining your corporation's Good Standing, your corporation will legally exist.
If your corporation is conducting business, however, the IRS requires your business to have a representative that exercises the company's rights. This person must receive compensation for their work, and this compensation would count as a salary and make the company representative an employee.
There are multiple factors to consider when trying to determine whether your corporation should hire employees:
- Legal Authority: The laws of the state where you form your corporation govern how you can run your business. As distinct legal entities, corporations have a variety of legal rights, including the ability to hire employees. This means that a corporation can have zero employees or can hire hundreds, or even thousands, of people.
- Existence in Perpetuity: A corporation exists once it has filed the Articles of Incorporation. Until a business has filed this document, it is not treated as a corporation, even if it is acting like one. Corporations exist until the filing of Articles of Dissolution and until formation documents are no longer kept with the state.
- Withdrawal of Ownership: In the early stages of a corporation, owners will commonly work within the business until they can hire employees. Although owners can draw a salary, they are not required to, and they can work for the business for free. It is possible, however, for owners to take dividends or withdrawals as compensation and to avoid payroll taxes. This practice, unfortunately, may cause problems with the IRS, even though it is legal.
The 60/40 rule is something you should make sure you understand when it comes to corporate employees. The IRS wants to be certain that it receives all required payroll taxes. If corporations were legally allowed to define all payments as dividends, it would drastically reduce the payroll taxes collected by the IRS.
While corporations can function perfectly well without paying any salaries, someone is doing the work of running the business, and the IRS considers these people employees. The 60/40 rule guarantees that the IRS will be able to collect some payroll taxes from corporations run by their owners. If the owners run a corporation and receive dividends instead of a normal salary, the IRS considers 40 percent of this money a dividend and the remaining 60 percent a salary.
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FAQs
Does a corporation have to have employees? No, there is no legal requirement that a corporation has to hire employees. In fact, many corporations will not need employees.
Can a corporation not have payroll? ›
Does an S corp have to have payroll? An S corporation generally must have payroll to pay its employees and any shareholders who may be considered employees. After the salaries are paid, any remaining business profit may be passed through to the shareholders via distributions.
Can an S-Corp owner not be an employee? ›
Setting Up Payments in an S Corp
Generally, owners of an S corp qualify as employees of the business and must receive a salary. If you're an owner who's actively involved in managing your S corp, you're considered an employee of the company and you'll pay yourself a W-2 salary.
Am I an employee if I own a corporation? ›
If you form a corporation, you can pay yourself a salary and receive a W-2 form, just like any other employee of your business.
Can you work for your own company? ›
Small business owners often talk about "working for myself," but in some cases it's literally true: You can own the company but legally be your own employee. The owner vs. employee question depends on the business structure, but also on whether you're defining yourself for the IRS or for some other government agency.
Can the owner of a corporation be paid a wage or salary? ›
As an owner, you can set a salary based on the what a comparable salary would be for the job you are doing and the projected profits of the business. The tax rules require working shareholders to be paid a salary so that Social Security and Medicare taxes are paid for the owner.
Can a company have zero employees? ›
An S corporation is a special form of corporation, named after the relevant section of the Internal Revenue Code. It is taxed on a pass-through basis, meaning it doesn't pay taxes in its own right. In principle, an S corporation can have no employees.
How do I pay myself as a corporation? ›
Business owners can pay themselves through a draw, a salary, or a combination method:
- A draw is a direct payment from the business to yourself.
- A salary goes through the payroll process and taxes are withheld.
- A combination method means you take part of your income as salary and part of it as a draw or distribution.
What Happens if an S Corp Does Not Pay Salary? If an S Corp owner attempts to evade payroll taxes by disguising salaries with distributions, they can face penalties of up to 100% plus negligence penalties. For this reason, it's better to do their due diligence and prevent having problems with the IRS.
What is the minimum salary for an S corp owner? ›
Note: The S Corp “reasonable salary” requirement only comes into play if you (and other shareholders) take distributions from the company's profits. The IRS can't impose a minimum salary requirement, so don't fret if your business isn't earning enough yet to pay yourself a salary comparable to others in your field.
If your business is classified as a C Corp, you are legally obligated to pay yourself a salary as a W-2 employee with the appropriate taxes taken out. This is because C corps are owned by shareholders, which means its earnings are essentially “owned” by the company.
Does the president of a corporation need to be an employee? ›
The company president is an employee whose main duty is leading the business. Other entities besides businesses employ presidents, including: Government agencies.
What is the difference between C Corp and S Corp? ›
The C corporation is the standard (or default) corporation under IRS rules. The S corporation is a corporation that has elected a special tax status with the IRS and therefore has some tax advantages. Both business structures get their names from the parts of the Internal Revenue Code that they are taxed under.
Can I run a company alone? ›
Don't go it entirely alone.
Running a one-person business doesn't mean help is off the table. Hiring freelancers helps your operation grow, makes achieving your long-term goals more realistic, and allows you to focus on other aspects of your business.
Can my employer sue me for starting my own business? ›
Depending on the circ*mstances, the employee that either leaves the company or is still working in the business but launches his or her own entity. It is possible that the employer may sue him or her based on competing interests in conflict as well as the opposite with the employer.
What is the name of a person who owns part of a corporation? ›
Shareholders, or stockholders, are the owners of a company's outstanding shares, which represents a residual portion of the corporation's assets and earnings as well as a percentage of the company's voting power.
What happens if a company does not make payroll? ›
The consequences of missing payroll are severe so companies should do everything they can to avoid it. Employees will almost certainly sue for damages under federal and state employment laws.
Can you do payroll without a payroll company? ›
Yes, you can run your own small business payroll, but it is not always the best idea. Running payroll without services can save you a few hundred dollars today, but it could cost you in the long run. In order to save money, many small business owners do payroll manually rather than using payroll software or services.
Do C Corp owners have to take a salary? ›
If your business is classified as a C Corp, you are legally obligated to pay yourself a salary as a W-2 employee with the appropriate taxes taken out. This is because C corps are owned by shareholders, which means its earnings are essentially “owned” by the company.
