Do I owe a penalty for the quarters I skipped?

Generally no. Employment tax liability arises when wages are paid, so a year whose only payday is in December creates no earlier deposit obligation. A monthly depositor who deposits that December payroll by January 15, 2027 avoids the §6656 failure-to-deposit penalty entirely. File zero Forms 941 for the empty quarters if the EIN is already registered for payroll.

Will one big December paycheck trigger an audit?

Not on its own. A late-year catch-up run is an ordinary pattern in closely held companies, and the risk sits in the amount, not the timing. A $0 salary against six figures of distributions is what Rev. Rul. 74-44 and David E. Watson, P.C. v. United States, 668 F.3d 1008 (8th Cir. 2012) are about, so a defensible number paid late beats no number at all.

Does this still work if I run a consulting or medical practice?

The payroll and §6654(g)(1) points hold for any S corporation. The §199A result does not. A specified service trade or business gets no qualified business income at all once taxable income passes the top of the phase-in range, $276,750 for a single filer in 2026, so the deduction that makes the example come out ahead is unavailable and the run is a net cost.

What if the company doesn't have cash for the deposit?

Size the salary to the cash, not the other way around. The net pay is usually a bookkeeping entry against distributions the owner already took, but the withholding and both halves of FICA are real money leaving the account, $71,535 in the example above. A smaller defensible salary deposited on time beats a larger one that misses January 15.

Do I have to run payroll if the S corp lost money this year?

If the company had no profit and made no distributions, there is generally nothing to recharacterize, because Rev. Rul. 74-44 reaches distributions paid in lieu of wages. Distributions taken in a loss year are the harder case. Note also that a loss year with no W-2 still costs you the §162(l) health insurance deduction under Notice 2008-1 and any 401(k) deferral.

The Journal / Business Tax

Running S corp payroll in December when you haven't paid yourself all year.

By Ewan Morkel, EANovember 5, 20266 min read

An S corporation owner who took distributions all year and never ran payroll has until December 31 to fix it, and the catch-up run is cheaper than it looks. On $340,000 of profit, a $95,000 December salary costs $14,577 in payroll tax and saves $19,043 in income tax.

Illustration of a payroll sheet beside a folder and two pencils

An online retailer will clear about $340,000 this year. The owner has moved $200,000 out of the business account in transfers the bookkeeper labeled "distribution," and the payroll account has never been opened. It's November. The question I get every year about now is whether running S corp payroll in December, the whole year's salary in one paycheck, costs more than it fixes.

Why the number isn't optional

An owner who works in the business is an employee, and the IRS has said so since 1974.

Under §3121(d)(1) a corporate officer is an employee for employment tax purposes, and Treas. Reg. §31.3121(d)-1(b) pulls in any officer who performs more than minor services. Rev. Rul. 74-44 is the companion: when an S corporation pays its shareholder-employees distributions instead of wages for the work they do, the IRS recharacterizes those distributions as wages. In David E. Watson, P.C. v. United States, 668 F.3d 1008 (8th Cir. 2012), a CPA paid himself $24,000 a year, took the rest as distributions, and ended up with $91,044 a year treated as reasonable compensation.

A zero-salary year with $200,000 of distributions on the books is the easiest version of that case for the IRS to make, because the distributions are the evidence. At stake is 15.3% on whatever gets recharacterized, plus interest and penalties. A salary you pick in December is a number you control. A salary an examiner picks in 2029 is not.

The deadline

Running S corp payroll in December works because the tax isn't due until the wages are paid.

Employment tax attaches when wages are paid, not ratably across the year, so there's nothing late about a December 15 paycheck. Your deposit schedule comes from the lookback period, July 1, 2024 through June 30, 2025 for 2026. A company that reported nothing then is a monthly depositor, so December wages are deposited by January 15, 2027. Make that date and the §6656 failure-to-deposit penalty, which runs 2% at up to five days late, 5% at six to fifteen days, 10% beyond that, and 15% once the IRS has billed you and gone unpaid ten days, never starts. One trap: if a single payday accumulates $100,000 of liability, it's due the next banking day, and you become a semiweekly depositor for the rest of the year and all of the next one.

The withholding is where this usually goes wrong. A lone $95,000 paycheck is the owner's regular wages, not supplemental wages, so the optional 22% flat rate isn't on the table. Treas. Reg. §31.3402(g)-1 would rule it out regardless, because that rate requires income tax withheld from regular wages in the current or prior year. Run the check through a standard monthly payroll period and the software annualizes $95,000 into $1,140,000 and withholds near the top rate. Set the amount deliberately on Form W-4, Step 4, or ask the payroll provider for the part-year employment method in section 6 of Publication 15-T, which the employee has to request.

One December payroll run on a $95,000 salary

Gross wages paid December 15, 2026: $95,000
Federal income tax withheld: $57,000
Employee Social Security and Medicare (7.65%): $7,267.50
Employer Social Security and Medicare (7.65%): $7,267.50
FUTA (0.6% on the first $7,000): $42
Federal tax deposit due January 15, 2027: $71,535
Net pay, settled against draws already taken: $30,732.50
Payroll tax the salary creates: $14,577
§199A deduction the W-2 wages unlock, against $400 without them: $47,500
Federal income tax the salary saves, at 35%: $19,043
Net result of running the payroll: $4,466 saved

2026 rates. Single filer, one S corporation, $340,000 of profit before owner compensation, no other income, the $16,100 standard deduction, and no qualified property for the §199A UBIA test. The full 6.2% Social Security rate applies because $95,000 is under the 2026 wage base of $184,500. With no W-2 wages the §199A deduction is the $400 floor, because taxable income of $323,900 is past the $276,750 top of the single phase-in range, where the 50%-of-W-2-wages limit applies in full. Both taxable income figures sit inside the 35% bracket, which starts at $256,225 for a single filer in 2026.

The part the generic pages miss

December withholding counts as if you paid it in April.

This is the piece that changes the arithmetic, and almost nothing written for owners mentions it. Under §6654(g)(1), tax withheld from wages is deemed paid in four equal parts on the four estimated tax due dates, whenever it was actually withheld. Treas. Reg. §1.6654-1 says the same, and the only way out is electing to prove the real withholding dates, which you'd never do here.

So the $57,000 withheld on December 15 is treated as $14,250 paid on April 15, June 15, September 15, and January 15. An owner who instead wires the same $57,000 as a January 15 estimated payment gets credit for all of it on January 15 and none earlier, and the three missed installments accrue the §6654 charge at the 7% underpayment rate in effect for the fourth quarter of 2026. That's roughly $1,670 between two payments of identical size on nearly identical dates. The safe harbor calculator will size the number first.

Before December 31

Four things expire with the calendar year, and only one of them is the payroll.

01The 401(k) deferral. The 2026 elective deferral limit is $24,500 under Notice 2025-67, plus $8,000 at age 50 or older, and for a W-2 owner it has to come out of a paycheck. Sign the deferral election before the payroll runs. If the plan doesn't exist yet, adopting one in 2027 can still take the employer contribution for 2026 but cannot create a deferral retroactively.
02The health insurance. Premiums the company paid for a more-than-2% shareholder have to land in Box 1 of the W-2 under Notice 2008-1, or the §162(l) deduction is gone. A year with no W-2 is a year with no deduction, and S corp owner health insurance on the W-2 walks the reporting.
03The support for the number. Minutes approving the compensation, a wage comparison for the role, and an honest count of hours, built now while you still remember the year. How much to pay yourself from an S corp covers what holds up.
04The cash. Not the net pay, which is a bookkeeping entry against draws the owner already took, but the $71,535 the company has to actually send the IRS.

What I'd do

Run it, and pick the salary before you pick the withholding.

Run the payroll, then ignore the advice to take the smallest salary you can defend, because above the §199A threshold that advice is backwards. For 2026 the threshold is $201,750 for a single filer and the phase-in ends at $276,750. Past that point the deduction is capped at 50% of W-2 wages, so an owner with no payroll and no qualified property has a cap of zero and falls back on the $400 floor the One Big Beautiful Bill Act added. Up there, wages don't cost you the deduction. They create it.

There's a crossover. Each dollar of salary lifts the 50% cap by 50 cents and cuts qualified business income by a dollar and change, so on $340,000 of profit the two lines meet near $95,000, which is why the example uses that figure. Treat it as where to land inside a defensible range, never as the range itself. Reasonable compensation is a question about what the services were worth, and an examiner is unimpressed by a salary reverse-engineered from a deduction. If your range is $130,000 to $170,000, take $130,000 and accept the smaller deduction.

One loose end. If the EIN was already registered for payroll, the IRS expects a Form 941 for every quarter, so file zero returns for the empty three. The Q4 Form 941 and the Form 940 are due February 1, 2027, or February 10 if every deposit was on time and in full. The W-2 goes to you and the Social Security Administration by February 1, 2027, with no ten-day grace. The $42 of FUTA is under the $500 deposit threshold, so it rides with the Form 940.