If you’re a San Diego or Carlsbad small business owner operating as an S-corporation, payroll is not optional — even if you’re the only person working in the business.
One of the most common issues we see with San Diego S-corps is owners either skipping payroll entirely or paying themselves incorrectly. Unfortunately, this is also one of the fastest ways to trigger penalties from the IRS and the State of California.
Let’s break down how to properly process payroll for an S-corp owner in California, what the California EDD requires, and how to stay compliant while still maximizing tax savings.
Why S-Corp Owners in California Must Run Payroll
If you actively work in your S-corporation, the IRS requires you to:
- Pay yourself a reasonable salary
- Run that pay through W-2 payroll
- Withhold and remit payroll taxes
- Take remaining profits as owner distributions
This applies whether your business is located in San Diego, Carlsbad, Encinitas, Oceanside, or anywhere else in California.
You cannot avoid payroll by only taking owner draws or distributions — and California agencies actively share payroll data with the IRS.
Step 1: Determine Reasonable Compensation (IRS Focus Area)
Before running payroll, you must determine a reasonable salary for the owner.
Reasonable compensation is based on:
- Your role and responsibilities
- Hours worked
- Industry pay standards
- Experience and skill level
- What it would cost to hire someone else to do your job
💡 Common San Diego S-corp mistake: Paying the owner $30,000 in wages while taking $150,000+ in distributions.
That’s a red flag for the Internal Revenue Service and often comes up during audits.
A CPA will typically document reasonable compensation using industry benchmarks and local market data.
Step 2: Register with California EDD (Required)
Before running payroll in California, your S-corp must be registered with the California Employment Development Department (EDD).
California EDD handles:
- State payroll tax reporting
- State Disability Insurance (SDI)
- Unemployment Insurance (UI)
- Employment Training Tax (ETT)
This registration is mandatory — even if the only employee is the owner.
Step 3: Set Up Owner Payroll Correctly
Once reasonable compensation is determined and EDD registration is complete, payroll must be set up properly.
This includes:
- Adding the owner as an employee
- Setting up federal tax withholdings
- Configuring Social Security and Medicare (FICA)
- Setting up California payroll taxes through EDD
- Linking payroll to your accounting software (QuickBooks, etc.)
Most San Diego businesses use payroll software, but owner payroll must still be configured correctly — especially for tax reporting.
Step 4: Run Payroll on a Consistent Schedule
Owner payroll should be processed on a regular schedule, such as:
- Monthly
- Semi-monthly
- Bi-weekly
Each payroll run should withhold:
- Federal income tax
- Social Security
- Medicare
- California state income tax
- California SDI (if applicable)
Skipping payroll or running it once per year is a major compliance issue, especially in California.
Step 5: Pay Payroll Taxes & File Required Reports
Running payroll is only half the job. You also must file and pay:
Federal Payroll Filings
- Quarterly Form 941
- Annual W-2 and W-3 filings
California Payroll Filings (EDD)
- Quarterly DE 9 and DE 9C forms
- Payroll tax payments to EDD
- Annual reconciliation filings
Late or missed filings with California EDD often result in notices, penalties, and interest — even if the payroll amounts were correct.
Step 6: Take Owner Distributions Separately
After payroll is handled correctly, additional profits can be taken as owner distributions.
Key points:
- Distributions are not subject to payroll taxes
- They must come after reasonable salary
- They must be tracked separately from wages
- They should never replace payroll
This is where S-corp tax savings come from — but only when payroll is done correctly first.
What If You Never Ran Payroll?
This is very common with San Diego S-corps, especially newer businesses.
Fixing it usually involves:
- Calculating back payroll
- Running late or catch-up payroll
- Paying back payroll taxes (federal and CA EDD)
- Filing late or amended payroll reports
- Cleaning up owner draws vs wages in QuickBooks
⚠️ This is not something we recommend doing without professional help — especially in California.
Common S-Corp Payroll Mistakes We See in San Diego
🚫 Only taking distributions
🚫 Paying an unreasonably low salary
🚫 Not registering with California EDD
🚫 Missing DE 9 / DE 9C filings
🚫 Running payroll once per year
🚫 Mixing owner draws and wages
These issues can create IRS and California EDD exposure very quickly.
Final Thoughts for San Diego & Carlsbad S-Corp Owners
S-corporations are powerful tax tools — but California payroll compliance is strict, and owner payroll is heavily scrutinized.
Getting payroll right protects you from:
- IRS audits
- California EDD penalties
- Back taxes and interest
- Stress during tax season
Need Help with S-Corp Payroll in San Diego or Carlsbad?
At Accounting Fresh, we help San Diego and North County S-corp owners:
- Determine reasonable compensation
- Register and file with California EDD
- Set up and run owner payroll correctly
- Fix late or missed payroll
- Stay compliant while minimizing taxes