Bookkeeping for S corp owners

Electing S corp status can save real payroll tax, but it comes with bookkeeping a sole proprietor never deals with. The savings only hold up if the books show a reasonable salary, distributions handled correctly, and personal costs kept out.

Here's what S corp books need to get right, month by month and at year end.

What S corp books need

A reasonable salary for each owner who works in the business, paid through payroll, before any distributions.
Distributions recorded as distributions, not as wages or expenses, and paid in proportion to ownership.
Payroll recorded in full: gross wages, the employer's payroll taxes, and what was withheld.
Health insurance for owners of more than 2% included in their W-2 wages.
Personal expenses kept out, and costs you pay personally for the business reimbursed under a written accountable plan.
Year-end books that tie to the 1120-S and each owner's K-1, including the balance sheet.

Salary and distributions

The IRS expects an S corp owner who works in the business to take a salary in line with what the work is worth. Distributions above that salary carry no Social Security or Medicare tax, which is where the savings come from. A salary that's too low, or distributions with no salary at all, is the most common reason S corps draw scrutiny.

Mistakes that cost S corp owners

Taking distributions all year and running payroll once in December, or not at all.
Paying owners unevenly when there's more than one, which can put the election at risk.
Running personal expenses through the business instead of reimbursing them properly.
Leaving the balance sheet to the CPA at year end, so the 1120-S starts from guesses.

How Cratchit helps

Cratchit keeps the S corp's books every day, records payroll from your payroll provider's reports, and keeps distributions separate from wages. It suggests a salary you can defend from wage data for your role, shows what you can safely take out as distributions after taxes and a cash cushion, and keeps a running tax projection with quarterly estimates on the calendar. At year end, your CPA downloads a trial balance matched to the 1120-S.

Common questions

How much salary should an S corp owner take?

Enough to be reasonable for the work you do, judged by what similar roles earn. The reasonable salary lookup gives a starting point from wage data; confirm the number with your CPA.

Are S corp distributions taxable?

They aren't subject to payroll tax. The S corp's profit is taxed on your personal return whether or not you take it out, and distributions above your basis can be taxed as a gain.

Do I need payroll for a one-person S corp?

Yes, if you work in the business. The salary has to run through payroll with withholding.

When should I elect S corp status?

Usually once profit is high enough that the payroll tax saved is more than the cost of payroll and the extra return. The S corp savings calculator shows the numbers.

Try Cratchit free for 10 days

Books for every company, a tax picture all year, and what's safe to take out. $149 a month after the trial, $49 for each additional business. Rather look around first? Take the guided tour with a sample family, or book a 15-minute call.

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Education, not advice. Confirm the details for your business with your CPA.