S-corp bookkeeping

S-corp bookkeeping starts the day an LLC or corporation’s S election takes effect, and the first thing it changes is how the owner gets paid. Before the election, a single-member LLC owner moves money out as a draw and nobody asks what it was for. After it, the owner who works in the business is an employee of the corporation as well as a shareholder, and every dollar that leaves for them has to be one of three things: wages, a distribution, or a loan.

That puts three new jobs into the monthly books: owner wages run through payroll at a reasonable salary, distributions recorded in equity and kept apart from wages, and the records the shareholder needs to track basis from one year to the next. Loans between owner and company sit alongside them in their own accounts.

Here is what each one looks like in QuickBooks Online, and what the preparer of Form 1120-S needs from the books at year end.

The five accounts an S-corp election adds

These accounts keep wages, payroll taxes, distributions, loans and the owner’s health insurance apart, so each one can be totaled for the return without digging through the bank feed:

Account	Account type	What it holds
Officer Compensation	Expenses	Gross W-2 wages paid to shareholder-employees
Employer Payroll Taxes	Expenses	The company’s share of Social Security and Medicare, plus FUTA and state unemployment
Shareholder Distributions	Equity	Non-wage payments of profit to shareholders, one account per shareholder
Loan to Shareholder / Loan from Shareholder	Other Current Assets / Other Current Liabilities	Documented loans in each direction, never netted together
2% Shareholder Health Insurance	Expenses	Health premiums the company pays for a more-than-2% shareholder

The election itself is made with the IRS on Form 2553. QuickBooks Online only records which return the company files: in Settings, then Account and settings, then Advanced, edit Company type and pick the S corporation (Form 1120-S) option as the tax form. Changing it does not change any past transactions.

The detail types for the two loan accounts are in shareholder loans. If the company was a single-member LLC before the election, bookkeeping for an LLC shows what its equity section looked like and why the old owner’s draw account stops being used.

What is a reasonable salary for an S corp?

A reasonable salary is what the business would have to pay someone else to do the owner’s job. The IRS fact sheet on wage compensation for S corporation officers (FS-2008-25) quotes the Form 1120-S instructions: “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” Rev. Rul. 74-44 applied the same rule to payments labeled as dividends to shareholders who worked in the business.

The same fact sheet says there are no specific guidelines for reasonable compensation in the Code or the regulations. Courts decide it on the facts, and the factors it lists include:

• Training and experience
• Duties and responsibilities
• Time and effort devoted to the business
• Payments to non-shareholder employees
• What comparable businesses pay for similar services
• Compensation agreements, dividend history, and the timing of bonuses

The figure is a decision for the shareholder and their CPA, not the bookkeeper; a method for documenting it, and what happens when it is too low, is in S corp reasonable salary vs. distributions. What the books have to show is that the decision was carried out: a salary paid through payroll on a regular schedule, before or alongside distributions, with withholding and deposits that match.

What is the 60/40 or 70/30 rule for S corps?

The 60/40 and 70/30 rules split profit into 60% or 70% salary and the rest as distributions. They are rules of thumb from tax blogs and forums, not IRS rules. FS-2008-25 names no percentage, and a split of profit says nothing about what the job would cost to fill, which is the question the courts ask.

Do all S-corp owners have to take a salary?

Not every shareholder. The fact sheet notes that the Treasury regulations exclude an officer who performs no services or only minor services and who neither receives nor is entitled to any pay. A shareholder who runs the business and takes money out of it is in the other group: courts have consistently treated those payments as wages, and the IRS can reclassify distributions as wages and assess the payroll tax, interest and penalties that were never paid.

How owner payroll runs

Owner wages go through a payroll service (QuickBooks Payroll, Gusto, ADP or similar), not a bank transfer coded to salary. Each run withholds and pays:

• Federal income tax withholding, and state withholding where it applies
• Employee Social Security at 6.2% up to the annual wage base, and Medicare at 1.45%, plus the 0.9% Additional Medicare Tax on wages above $200,000
• The employer’s matching 6.2% Social Security and 1.45% Medicare
• FUTA, and state unemployment tax, which some states let corporate officers opt out of

Each payroll run debits Officer Compensation and Employer Payroll Taxes, credits the payroll liability accounts for everything withheld or owed, and credits the bank for the net pay. The liabilities clear when the tax deposits go out.

Distributions vs. wages vs. loans

Money that moves from the company to the owner falls into one of three categories, and each one lands in a different part of the books:

Category	How it is paid	Payroll tax?	Where it shows
Officer wages	W-2 payroll run	Yes, FICA and withholding	Profit and loss, as an expense
Shareholder distributions	Check or bank transfer	No	Balance sheet, as a reduction of equity
Loan to shareholder	Transfer with a signed note	No, but interest is income to the company	Balance sheet, as an asset

Recording a shareholder distribution

A $5,000 distribution to the sole shareholder, paid by transfer from the operating account:

Account	Account type	Debit	Credit
Shareholder Distributions	Equity	5,000.00
Operating Checking	Bank		5,000.00

A distribution never touches the profit and loss statement. It reduces equity, and at year end the distributions account is closed into retained earnings. With more than one shareholder, distributions follow ownership percentages; the dividends post covers why, and why an S-corp distribution is not a C-corp dividend unless the company has earnings and profits left from years as a C corporation.

Shareholder loans

When the owner puts money in to cover a shortfall, or takes money out to be paid back, the transaction is a loan only if it is documented like one: a signed note, interest at no less than the applicable federal rate, and repayments that actually happen. Without those, the IRS can treat a loan to the owner as wages or a distribution. Shareholder loans has the entries in both directions and the QuickBooks setup.

What is the 2% rule for S corps?

The 2% rule is how an S corporation treats health insurance for a shareholder who owns more than 2% of the company. Under IRC §1372 the shareholder is treated like a partner, not an employee, for fringe benefits, and the IRS page on S corporation compensation and medical insurance issues sets out what follows:

1. The company deducts the premiums it pays or reimburses, and reports them as wages on the shareholder’s W-2.
2. They go in Box 1, not Boxes 3 and 5. The premiums are subject to income tax withholding but not Social Security or Medicare when they are paid under a plan for all employees or a class of them.
3. The shareholder may deduct them on Form 1040 as self-employed health insurance under IRC §162(l), if the coverage was established by the S corporation and the shareholder was not eligible for a subsidized plan through another employer or a spouse’s employer.
4. The company has to pay. Under Notice 2008-1, a policy in the shareholder’s own name counts as established by the S corporation only if the company paid or reimbursed the premiums and put them on the W-2. Premiums the shareholder pays personally do not qualify.

In QuickBooks Online, post the premiums to 2% Shareholder Health Insurance rather than to general insurance, and give the year’s total to the payroll provider before the last payroll of the year so it reaches the W-2. Adding it after W-2s are filed means a corrected W-2.

Shareholder basis and the March 15 deadline

An S corporation generally pays no federal income tax itself. It files Form 1120-S and issues a Schedule K-1 to each shareholder, who reports their share of the income on their own return.

When are S-corp tax returns due?

For a calendar-year S corporation, Form 1120-S and the K-1s are due March 15, or the next business day when it falls on a weekend or holiday. That is a month before individual returns, and Form 7004 extends it six months, to September 15. Shareholders cannot finish their own returns without the K-1, so the December books need to be closed and reconciled early in the new year.

Shareholder basis and Form 7203

A shareholder can deduct S-corp losses only up to their stock and debt basis, and a distribution above stock basis is taxed to them as gain from the sale of stock. The Form 7203 instructions require the form when a shareholder claims a loss or deduction from the S corporation, receives a non-dividend distribution, disposes of stock, or receives a loan repayment from the company. Any year with a distribution needs it.

Basis is a shareholder-level figure, and the company’s equity section is not the same number. The books supply the inputs in the order the instructions apply them:

1. Increases: all income on the K-1, including tax-exempt income, plus capital contributions
2. Distributions: cash and property paid out, not below zero
3. Nondeductible expenses: for example the disallowed half of business meals and penalties
4. Losses and deductions from the K-1

Distributions recorded per shareholder, contributions kept out of income, and nondeductible expenses posted to their own accounts are what let the preparer fill in Form 7203 without rebuilding the year. What your CPA needs at year end lists the full handoff file.

Common questions

Can I leave money in my S corp at the end of the year?

Yes. Under IRC §1366 each shareholder is taxed on their share of the year’s income whether or not it is distributed, so profit left in the company has already been taxed to the owners. It stays in the company’s equity, and taking it out later as a distribution does not tax it again, as long as the shareholder has the basis to cover it.

Do S corps get taxed twice?

Generally no. Income passes through to the shareholders and the company pays no federal income tax on it. The exceptions apply mostly to former C corporations: the built-in gains tax under IRC §1374 and the tax on excess passive investment income under §1375. Some states also tax S corporations at the entity level.

Does an S corporation need a separate bank account?

No IRS rule names one, but run the company through its own accounts under its own EIN anyway. Personal spending through the company account has to be recorded as a distribution, a loan, or wages, and courts look at commingled funds when deciding whether a corporation’s owners keep their limited liability.

Can ChatGPT do my bookkeeping?

It can explain these rules and draft a journal entry for you to check. It cannot connect to the bank feed, run payroll, reconcile accounts, or carry a shareholder’s basis from one year to the next, so it can support the bookkeeping but not do it.

The other questions people ask alongside this one, such as the five-year wait to re-elect after an S election ends, whether an S corp is worth it, or how much tax a given profit produces, are tax planning questions for a CPA rather than bookkeeping.

Getting your S-corp books closed

An S-corp election only pays off when the books back up the return: wages through payroll, distributions per shareholder, and a balance sheet the preparer can trust. When those are missing, the cost shows up at year end as corrected W-2s, rebuilt equity accounts, and a late K-1.

Ledgerbrook closes the month for S corporations in their own QuickBooks Online company: every account reconciled, officer wages and distributions tracked per shareholder, and statements by the 5th business day. It is $99 a month for up to 3 accounts, up to 200 transactions a month, and $199 past either limit. If the election started mid-year or payroll and distributions need untangling, catch-up is $99 per month of backlog.

Outsourced bookkeeping for small business explains how it works. Or send your file for a free review and get a written answer within 48 hours on what it needs and the fixed price.