Question: We process payroll for several companies. A new client says that company owners are exempt from all payroll taxes. Is there some law out there that we don’t know about?
Answer: No, there is no law that exempts company owners from payroll taxes. The real question is whether company owners are employees. How owners are taxed depends on how their business is organized. For example, sole proprietors and partners aren’t employees. They pay quarterly estimated taxes, and they’re subject to self-employment taxes, instead of FICA taxes. Owners of corporations, whether organized under Subchapter C (i.e., regular tax-paying corporations) or Subchapter S (i.e., pass-through entities) of the tax code, who render substantial services to their corporations, are employees of those corporations and are subject to income tax withholding and FICA taxes.