S Corp Payroll for Therapists in California: How to Put Yourself (or an Associate) on W-2 Payroll

Who this page is for

I wrote this for a specific friend-of-a-friend situation I hear about all the time:

• Your practice is a corporation (often a professional corporation) taxed as an S corp.
• You already have a bookkeeper, CPA, or tax service, and you have an EIN.
• You have not set up payroll yet, for yourself or for anyone else.

I run payroll for my own group practice in Gusto, so this is the order I would walk a colleague through. It is general education, not tax or legal advice; your CPA and attorney make the calls for your situation.

Why an S corp needs payroll at all

The IRS says S corporations must pay reasonable compensation to a shareholder-employee for the services they provide before taking non-wage distributions, and it can reclassify distributions as wages if the salary is too low (IRS: S corporation compensation). If you are seeing clients through your S corp, at least part of what you take out generally needs to run through W-2 payroll.

The IRS lists factors like your training and experience, your duties, the time you put in, and what comparable businesses pay for similar services. How much salary is “reasonable” for you is a CPA decision. Bring that number to payroll setup; don’t guess it.

Step 1: Confirm your EIN and your salary plan

1. EIN: You already have one if your S corp is set up. Payroll uses the corporation’s EIN, not your Social Security number. The IRS says a valid EIN is required to file and pay federal employment taxes electronically (IRS: employment tax due dates).
2. Salary amount and pay schedule: Get your reasonable-compensation number and a pay schedule from your CPA (see Step 6 for California pay timing rules).
3. Who is on payroll: Just you? You plus an associate or admin? Each person on W-2 needs the paperwork in Step 4.

Step 2: Register as an employer with the California EDD

California payroll taxes run through the Employment Development Department (EDD). According to EDD:

• A business must register as an employer within 15 days after it hires employees and pays more than $100 in wages in a calendar quarter (EDD: Step 1, Register as an Employer; California Employer’s Guide, DE 44).
• You register online through e-Services for Business and receive an eight-digit employer payroll tax account number (EDD: Register for a Payroll Tax Account; DE 44).
• California employers must file payroll returns and make payroll tax deposits electronically; e-Services for Business is EDD’s tool for that (EDD: Required Filings and Due Dates).

Some payroll services can help with state registration, but the account belongs to your corporation, and you’ll want your own e-Services login so you can see what’s been filed.

Step 3: Know what gets withheld and what the business pays

You don’t need to calculate these by hand (that is what payroll software is for), but it helps to know the pieces. I am not listing rates here because they change; follow the links for current numbers.

Timing matters too. Federal deposits follow a monthly or semiweekly schedule (IRS), and EDD says California SDI and PIT deposit dates are tied to your federal deposit schedule and how much PIT you’ve withheld (EDD). A payroll service handles these deposits on each pay run.

Step 4: Hiring paperwork (including for yourself)

1. Form I-9: USCIS says employers must complete and keep a Form I-9 for every person they hire for pay (USCIS: Completing Form I-9).
2. Form W-4 and DE 4: The federal W-4 and California DE 4 tell payroll how much income tax to withhold (IRS W-4; EDD DE 4).
3. New-hire report (DE 34): EDD says employers must report new or rehired employees to the New Employee Registry within 20 calendar days of their start-of-work date (EDD: New Employee Registry). Gusto lists DE 34 among the California forms it files (Gusto Help Center).
4. Wage Theft Prevention Act notice: California Labor Code 2810.5 requires a written notice to employees at the time of hire, and the Labor Commissioner publishes a template (DIR: Wage Theft Protection Act). The Labor Commissioner notes this notice requirement does not apply to employees who are exempt from overtime (DIR paid sick leave FAQ), so it mainly matters for non-exempt (hourly or overtime-eligible) staff. Ask your attorney which applies.
5. EDD notices and pamphlets: After you register, EDD sends a workplace notice to post (such as DE 1857A) and lists pamphlets to give employees, such as DE 2320, DE 2515, and DE 2511 (EDD: Required Notices and Pamphlets).

Step 5: Workers’ comp

• Employees: California’s Division of Workers’ Compensation says employers are required by law to have workers’ comp insurance even if they have only one employee (DIR: Employer information; DWC FAQs for employers). If you hire an associate or admin, plan on it.
• You, as owner-officer: California has specific rules here. Under Labor Code 3352, an officer or director who is the sole shareholder of a private corporation is generally excluded unless they elect coverage, and certain other officers with qualifying ownership and health coverage can sign a written waiver (Labor Code 3352; WCIRB: Executive officers). These rules also address owners of professional corporations.
• Talk to a workers’ comp broker before you run your first payroll. Whether you should be covered, excluded, or sign a waiver depends on your ownership and your situation. Any licensed workers’ comp broker can quote coverage.

Step 6: Paid sick leave, pay schedule, and pay stubs

• Paid sick leave: The Labor Commissioner says California employers must generally provide at least 40 hours or 5 days of paid sick leave per year; employees qualify after working 30 days within a year and can start using it after 90 days. The accrual option is at least 1 hour per 30 hours worked. Employers must show available sick leave on the pay stub or a same-day statement and post the paid sick leave poster (DIR: Paid Sick Leave FAQ). Check whether your city has its own ordinance.
• Pay schedule: Most California employees must be paid at least twice each calendar month on regular paydays set in advance, with a posted notice of payday. Executive, administrative, and professional exempt employees may be paid monthly under specific rules (DIR: Paydays and pay periods). Ask your CPA what schedule fits your owner salary.
• Pay stubs: Labor Code 226 requires an itemized wage statement each payday showing gross and net wages, deductions, the pay period dates, the employee’s name and last four SSN digits (or an employee ID), the employer’s legal name and address, and, for non-exempt employees, hours and rates (DIR). Payroll software generates these.

Step 7: Quarterly and annual filings

Gusto says it files federal Forms 941, 940, and W-2, and in California the DE 9, DE 9C, DE 88 deposits, and DE 34 (Gusto payroll features; Gusto Help Center: forms Gusto files). You still review each payroll and keep company details current. The IRS also notes you stay responsible for your payroll taxes even if you use a payroll service (Publication 15), so check your agency accounts now and then.

Setting it up in Gusto

This is the part where I can save you the most time. I use Gusto for my own group practice, and for an S corp owner with an existing CPA it is a clean way to get payroll running without changing anything else. The setup goes roughly like this:

1. Create the company account with your corporation’s legal name, EIN, and address.
2. Add your California EDD employer payroll tax account number (or follow Gusto’s prompts if you are still registering).
3. Add yourself (and anyone else) as an employee with the salary and pay schedule your CPA gave you. Gusto collects W-4, DE 4, and direct deposit information through employee onboarding.
4. Connect your business bank account for payroll and tax debits.
5. Set up or connect workers’ comp (see Step 5).
6. Invite your accountant (see the next section), then run your first payroll and check the pay stub.

Referral disclosure: This is my Gusto referral link. I may receive a referral reward if you sign up and run payroll through it. It costs you nothing extra, and you get the same help from me either way. Prefer something else? Your CPA’s payroll service, ADP, or OnPay can do the same job.

For a fuller look at Gusto for therapy practices, see the Gusto review on Therapist Front Page, my publication for therapists.

Where your bookkeeper and CPA fit

You don’t have to fire anyone or switch anything. The split usually looks like this:

• Your bookkeeper / tax service: keeps doing your books, reconciliations, S-corp return, and personal return. They also set your reasonable salary and tell you about distributions.
• Gusto (or another payroll service): runs each pay run, withholds and deposits payroll taxes, produces pay stubs, and files payroll returns.
• Access: Gusto lets the primary admin add an accountant as an admin with full or custom permissions (Gusto Help Center: roles and permissions), so your CPA can pull payroll reports for the books.

Some CPA firms run payroll themselves or prefer a specific provider. Ask yours first; if they are happy for you to use Gusto, you get one place for pay runs and filings, and they get read access.

Hiring an associate: W-2, not 1099

If your next step is bringing on an AMFT, ASW, or APCC, this is the part not to get wrong. California law says a trainee, associate, or applicant for licensure may perform services only as an employee or volunteer, not as an independent contractor, may only be paid by their employer, and can’t pay the employer’s obligations, such as rent (Business and Professions Code 4980.43.3). The BBS asks paid associates for W-2s for each year of experience when they apply for licensure (BBS AMFT FAQ). ASWs and APCCs have parallel rules in their own practice acts; check the BBS for your license type.

For licensed clinicians and admin staff, California uses the ABC test to decide employee vs. contractor (Labor and Workforce Development Agency: ABC test; EDD: Employee or Independent Contractor). Confirm every classification with an employment attorney. If you are planning to grow a team, see Growing a Group.

Quick checklist

• Reasonable salary and pay schedule set with my CPA.
• EDD employer payroll tax account number (registered within 15 days of paying over $100 in wages in a quarter).
• e-Services for Business login of my own.
• W-4, DE 4, and I-9 for everyone on payroll.
• DE 34 new-hire report within 20 days (or confirmed my payroll service files it).
• Wage notice (Labor Code 2810.5) for non-exempt staff, EDD notices posted, sick leave poster posted.
• Workers’ comp sorted with a broker, including my own owner-officer status.
• Paid sick leave policy set.
• Payroll provider filing 941, 940, W-2, DE 9, and DE 9C; accountant has access.