Why S corporation books are different
In a sole proprietorship, money the owner takes out is simply a draw, and it does not change the tax. In an S corporation the same transfer can be wages, a distribution, a loan or a reimbursement, and each is treated differently on the return. Wages carry payroll tax and appear on a W-2. Distributions reduce the owner's stock basis. Loans need to be repaid or documented. Reimbursements need an accountable plan behind them.
If the books record all of these as one account called draws, someone has to reconstruct the year before the return can be prepared. Keeping them separate month by month avoids that.
The owner-pay entries
These are the entries we pay the most attention to in S corporation books:
- Officer wages recorded from the payroll reports, gross pay and taxes split out, so the books agree with the W-2
- Distributions recorded to their own account, by shareholder, with dates
- Shareholder loans in either direction kept in a separate balance sheet account
- Reimbursements under an accountable plan recorded as business expenses, not as distributions
- Health insurance premiums for a more-than-2% shareholder coded so they can be reported in W-2 Box 1
Wages come before distributions. If distributions are flowing and payroll has not started, that is worth raising early rather than at year end.
What monthly bookkeeping includes
Our bookkeeping service is monthly categorization and reconciliation, a month-end close so each period is actually finished, and financial statements you can read. The books are maintained so the tax return is built from them directly, rather than rebuilt from them.
It does not include audit or attestation work, and it does not include payroll processing. Payroll is covered separately as payroll support, and who does which payroll task is agreed in writing.
- 1.Transactions categorized and bank and card accounts reconciled to statements
- 2.Payroll reports matched to the wage and tax accounts
- 3.Distributions and shareholder loan balances reviewed
- 4.Unexplained items followed up with you
- 5.Profit and loss and balance sheet issued for the month
The year-end handoff
A clean S corporation year end means the balance sheet ties out as well as the profit and loss. Bank, card and loan balances agree with statements. Payroll totals agree with the year's W-2s and quarterly filings. Each shareholder's distributions and loans are listed. Fixed assets bought or sold are recorded with dates and invoices.
With that in place, preparing Form 1120-S and Massachusetts Form 355S is mostly a matter of mapping accounts to lines. Without it, the first weeks of tax season go to reconstruction.
If the books are behind
Many owners come to this after the election, when they realize the books were set up for a sole proprietorship. That is a normal starting point. Catch-up work is scoped and priced separately, and monthly bookkeeping starts from a clean position once it is done.
The catch-up bookkeeping readiness checklist shows what to gather before a cleanup starts.
Where we come in
We give you a scope and a price in writing before anything starts. Bring a recent bank statement, access details for your accounting software if you use one, your payroll reports and last year's return; the page on what to bring to an accounting consultation lists the rest.
General information for owner-led businesses, not advice for your specific situation. Tax and accounting rules change, and how they apply depends on facts particular to your business. Talk to us — or to another qualified professional — before acting on anything here.
