Bookkeeping for S corporations: payroll, distributions and shareholder loans

Which accounts does an S corporation need?

How is owner payroll recorded?

Each payroll records gross wages as officer wages, employee tax withholdings and employer payroll taxes as liabilities and expenses, and net pay from the bank. When the taxes are deposited, the liabilities clear. Payroll software usually posts these entries. See S corp owner payroll and reasonable salary.

Pay the salary regularly through the year.

How are distributions recorded?

Debit distributions and credit the bank. Distributions are not expenses and are not on the W-2. With more than one shareholder, distributions must be made in proportion to ownership, because S corporations can have only one class of stock. Personal costs paid from the company account are distributions too, unless repaid.

Distributions should not be paid unless the owner has already received a reasonable salary for the year, and are usually paid from profit already earned. Keep a running schedule of distributions by shareholder, which the tax preparer will need.

How are shareholder loans handled?

Money the company lends the owner should have a written note, a repayment schedule and interest at least at the IRS applicable federal rate; otherwise the IRS may treat it as a distribution or as wages. Money the owner lends the company is a liability; repayments of principal are not income. A direct loan from the shareholder gives debt basis, which can allow losses to be deducted. See contributions vs loans.

Record interest on shareholder loans as interest income or expense, and keep repayments on schedule; long-unpaid balances invite questions.

How is owner health insurance handled?

For a shareholder owning more than 2%, the company pays or reimburses the premiums, deducts them, and includes them in the owner's W-2 box 1 wages, but not in Social Security and Medicare wages. The owner can then claim the self-employed health insurance deduction. See the self-employed health insurance deduction.

How are owner expenses reimbursed?

Under an accountable plan: the owner submits receipts and a business purpose for business costs paid personally, such as a home office share or mileage, and the company reimburses them, tax-free to the owner and deductible to the company. Without a plan, reimbursements can become taxable wages.

Write the plan down, even as a short company resolution.

The rules are set out in accountable plans.

What should be checked each month?

1. Payroll liabilities clear

   Deposits made on time.

2. No owner draws

   Owner withdrawals recorded as distributions or loans.

3. Loan balances agree

   To the loan agreements.

4. Reimbursements documented

   Under the accountable plan.

What does a year look like?

A one-owner S corporation earns $150,000 before owner pay. The owner takes a $70,000 salary, on which the company pays about $5,355 of employer Social Security and Medicare tax plus a small amount of unemployment tax. The company also pays $9,000 of owner health insurance, added to the W-2. Profit after these costs, about $65,600, passes through on the K-1. The owner takes $50,000 of it as distributions, recorded in equity; the rest stays in the company.

What does the year end involve?

Add owner health insurance to the W-2, file payroll returns and Forms W-2, and prepare Form 1120-S with Schedules K-1. The return includes a balance sheet and reconciliations of book income and retained earnings, unless the company meets the small-company exceptions. Shareholders track their own stock and debt basis, attaching Form 7203 when required. See Form 1120-S and Forms W-2 and W-3.

This guide is general information. It is not tax or legal advice for your situation.