If you run an S-Corporation and you (the owner) provided services in 2025 but didn’t run payroll, you’re not alone—and it’s fixable. The key is doing it the right way, because payroll tax rules are very “date-specific,” and trying to “backdate” things can create bigger issues.
This guide walks you through the practical steps to clean it up, reduce penalties, and get back into a compliant rhythm—especially if you’re a business owner in Carlsbad, Oceanside, Encinitas, Escondido, San Diego, Carlsbad, La Jolla, or Del Mar.
Important note (not legal/tax advice): The right fix depends on your exact facts (distributions taken, when cash moved, any payroll filings already made, etc.). Use this as a roadmap and coordinate with your CPA/payroll provider.
Why missing payroll is a big deal for S-Corps
The IRS is clear: S-corps must pay “reasonable compensation” to shareholder-employees for services performed before taking distributions.
So if you took owner distributions in 2025 but ran $0 W-2 wages, that can raise red flags—especially if the business was profitable.
The biggest mistake: trying to “backdate” payroll
Payroll and employment tax rules are based on when wages are actually paid (cash basis), not when you wish they were paid.
Also, for income tax purposes, the IRS generally treats back pay as wages in the year it’s paid.
Translation: If it’s already 2026 and you run payroll now, that’s typically 2026 payroll, not 2025—unless your facts support that wages were actually/constructively paid in 2025 (a fact-specific issue you should review with your CPA).
Step-by-step: what to do now
1) Freeze distributions until payroll is set up
If you’re still taking distributions, pause them until you implement a clean payroll process. IRS expects wages first, distributions second.
2) Set (and start running) a reasonable salary going forward
Get payroll running immediately with a reasonable wage for your role. “Reasonable” depends on duties, time, experience, and comparable pay. The IRS doesn’t give a magic ratio—your facts drive it.
3) Figure out what actually happened in 2025 (this determines the fix)
Pull:
- 2025 profit & loss, distributions, owner draws, and any “payroll” transfers
- Bank statements showing owner payments
- Any payroll filings you did (or didn’t) submit (941/940, W-2s, state filings)
This step determines whether you’re dealing with:
- Scenario A: Truly no wages were paid in 2025 (just distributions), or
- Scenario B: Wages were paid/treated as wages but not properly filed/reported (rare, but possible)
4) Catch up federal payroll filings the right way (941 / 941-X)
A common surprise: the IRS instructions say that if you haven’t filed a final return, you generally must file Form 941 each quarter even if you didn’t pay wages.
- If you filed 941s but they were wrong, you generally use Form 941-X to correct previously filed Forms 941.
5) Make payroll tax deposits and expect potential penalties (then work on relief)
If deposits were due and missed, the IRS can assess a Failure to Deposit penalty based on how late the deposit is.
The IRS also publishes deposit timing rules (monthly vs semiweekly).
After you’re compliant, you can explore penalty relief:
- Reasonable cause relief
- First Time Abate (FTA) in qualifying cases
6) Don’t forget W-2/W-3 compliance (if wages were actually paid)
If wages were paid, you may have W-2/W-3 obligations and potential information return penalties for late/incorrect filing.
7) California employers: also fix EDD filings (DE 9/DE 9C/DE 88)
If you’re in California, you’re also dealing with EDD requirements:
- Required filings and due dates for DE 9/DE 9C and deposits
- Late DE 88 deposits can trigger a 15% penalty plus interest (EDD guidance).
- If you need to correct prior filings, EDD has a formal correction process (and you generally must have the quarter filed before adjustments are processed).
A practical “Missed 2025 Payroll” checklist
This week
- Stop owner distributions temporarily (or reduce them)
- Start payroll now (2026) at a reasonable rate
- Pull 2025 distributions + bank activity + P&L
Next
- Determine if 2025 had any wages actually paid (facts matter)
- File missing 2025 Forms 941 (even zero-wage quarters may still require filing)
- If needed, correct prior 941s using 941-X
- Catch up CA EDD filings/deposits (DE 9/DE 9C/DE 88)
After compliance
- Evaluate penalty abatement options (reasonable cause / first-time abate)
- Put payroll on autopilot (same schedule every month) + quarterly review
FAQ
“Can I just book a journal entry and call distributions ‘wages’?”
Be careful. Payroll wages come with withholding, employer taxes, deposits, and reporting. Mislabeling after the fact without filing payroll forms can create a mismatch with IRS/EDD systems. If you previously filed 941 incorrectly, corrections are typically done using 941-X.
“If I run payroll now, does it fix 2025?”
Running payroll now generally creates current-year wages, and deposit rules are based on wage payment dates.
Your 2025 “reasonable comp” issue may still need a strategy review based on what happened in 2025.
“What’s the fastest ‘clean’ way forward?”
- Start reasonable payroll now.
- File missing 941s (and CA EDD filings) to get compliant.
- Then address penalties/abatement and any needed corrections.
Local note for San Diego / Carlsbad business owners
If you’re an S-Corp owner in Carlsbad, Encinitas, Solana Beach, San Diego, La Jolla, or Del Mar, missed payroll tends to show up alongside messy bookkeeping (uncleared liabilities, “owner draw” accounts doing too much, distributions not tracked cleanly). Cleaning up payroll without cleaning up the books usually leads to rework.