QuickBooks for S Corp: Equity, Salary and Distributions

Quick Answer: QuickBooks for an S corp needs equity accounts for common stock, additional paid-in capital, shareholder distributions and retained earnings instead of a sole proprietor's owner's draw. Pay owners who work in the business a reasonable salary through payroll, record other money taken out as distributions, and repay business expenses under an accountable plan. At year end your preparer needs officer compensation, distributions by shareholder and a clean balance sheet for Form 1120-S and the K-1s.

An S corporation is a corporation for bookkeeping purposes even though its profit is taxed on the owners' returns. That changes three things in QuickBooks: the equity section of the chart of accounts, how owners get paid, and what the year-end file must show. Most S corp cleanups trace back to books set up like a sole proprietorship, with an owner's draw account and no payroll.

Why doesn't a sole proprietor setup work for an S corp?

A sole proprietor's books have one equity story: the owner puts money in, takes money out as draws, and profit belongs to the owner. Starter charts of accounts built for small businesses usually include an owner's investment account and an owner's draw account for that reason, and many S corps keep them by default.

An S corp has shareholders, and the IRS treats payments to them by category. The IRS S corporations page lists the forms involved: Form 1120-S and its Schedule K-1 for income tax, Forms 941 or 943 and 940 for employment taxes, and Form 2553 to make the election. So the corporation's books must separate:

• Wages to shareholder-employees, through payroll.
• Distributions of profit to shareholders.
• Reimbursements of business expenses a shareholder paid personally.
• Loans between the corporation and a shareholder, in either direction.

A single draw account mixes all four.

Which equity accounts should an S corp have?

In QuickBooks Online, equity accounts live in the chart of accounts with an account type of Equity. Create or rename these:

If there is more than one shareholder, add a sub-account of Shareholder Distributions for each, so the totals per person are visible without a report filter. Distributions are normally in proportion to ownership, because an S corp may have only one class of stock; a large mismatch between shareholders is worth raising with your preparer.

Separate from equity, a Loan from Shareholder liability account and a Loan to Shareholder asset account keep loans out of distributions. The 1120-S instructions ask for loans from shareholders on the balance sheet, so a loan recorded as a contribution or a distribution is a real error, not a cosmetic one.

For how each account type moves with debits and credits, Intuit's debits and credits article has the table; numbering conventions for the rest of the chart are in chart of accounts for a small business.

How should an S corp owner be paid?

Through payroll first. The IRS page on S corporation compensation says an S corp must pay reasonable compensation to a shareholder-employee for services provided before non-wage distributions may be made, and that the IRS can reclassify distributions as wages subject to employment taxes. It lists factors such as training and experience, duties, time devoted to the business, what comparable businesses pay for similar services, and payments to non-shareholder employees.

What counts as reasonable is a judgment for you and your tax adviser, and this article does not set a number. In QuickBooks, the bookkeeping side is:

1. Set the owner up as an employee in QuickBooks Payroll (or post the summary from your outside payroll provider).
2. Map officer wages to a separate expense account, such as Officer Compensation, not general Wages. The 1120-S instructions report compensation of officers on its own line, separately from salaries and wages of other employees.
3. Map the employer share of payroll taxes to a payroll tax expense account, and withholdings to payroll liabilities that clear when deposits are made.

If you want to see how salary level changes the tax outcome, the S corp tax savings calculator builds that comparison in a spreadsheet.

Recording a distribution

When the owner moves $5,000 from the business checking account to a personal account and it is not wages, a reimbursement or a loan, record it as a transfer or check from checking to Shareholder Distributions. Write "distribution" and the shareholder's name in the memo.

When the bank feed brings the transfer in, categorize it to Shareholder Distributions, not to an expense. If you use bank rules for recurring transfers to the owner, set the rule to that equity account. The general mechanics of categorizing feed lines are in categorizing bank transactions in QuickBooks Online.

Reimbursing the owner under an accountable plan

Owners often pay for business things personally: a phone bill, mileage, a conference. Repaying those as reimbursements, rather than as distributions or extra wages, depends on an accountable plan. Publication 463 gives the three rules: the expenses must have a business connection, the employee must adequately account for them within a reasonable period, and any excess must be returned within a reasonable period.

In QuickBooks this looks like:

• An expense report or receipt for each item, kept with the entry.
• A bill or expense paid to the shareholder, with each line coded to the real expense account (Phone, Travel, Vehicle).
• Mileage reimbursed at a rate per mile from a trip log, not a round monthly figure.

A flat monthly "allowance" with no accounting does not meet those rules, and is generally treated as wages.

What about health insurance for the owner?

The same IRS compensation page explains that health insurance premiums paid for a shareholder-employee owning more than 2 percent are deductible by the S corporation and reported as wages in box 1 of the shareholder's W-2, though, when paid under a plan for employees, not in the Social Security and Medicare boxes. In QuickBooks, that usually means recording the premium as an expense when paid and making sure the payroll provider adds it to the owner's W-2. Tell whoever runs payroll before the last payroll of the year.

How do you fix an owner's draw account?

If the books were set up with an owner's draw account, clean it up before the year is filed:

1. Run a transaction report for the Owner's Draw account for the year and export it.
2. Sort each line into one of four groups: genuine distribution, business expense paid from the wrong place, personal expense paid by the business, or loan.
3. Recode business expenses to their expense accounts.
4. Move genuine distributions to Shareholder Distributions. If every line is a distribution, renaming the account is the quickest fix, but only then.
5. Decide with your preparer how personal expenses paid by the business are treated (usually as distributions, or as a receivable from the shareholder), and record that.
6. Move loans to the loan accounts.
7. If owners were paid only through draws all year, talk to your preparer about payroll now; recoding entries does not create wages that were never run through payroll.

When old statements are needed for the review and the bank feed does not reach back, QuickBankConvert turns statement PDFs into rows QuickBooks can import, which makes the sort in step 2 a spreadsheet filter rather than a page-by-page read.

What numbers does your preparer need for Form 1120-S?

From the Form 1120-S instructions:

• Officer compensation for the year, separate from other wages.
• Distributions to each shareholder, which go on Schedule K and K-1 line 16d.
• Nondeductible expenses (line 16c), such as penalties, which reduce shareholder stock basis.
• Repayments of loans from shareholders (line 16e).
• A balance sheet per books for Schedule L, including retained earnings, and the reconciliation of book income to return income on Schedule M-1.
• The accumulated adjustments account on Schedule M-2, which tracks undistributed income; your preparer builds it from income, losses and distributions.

A clean handoff file contains the year-end trial balance, a reconciled bank and card account for every month, the payroll annual summary, the distributions report by shareholder and a list of loans with balances. Reconciled months matter most; for monthly steps see the month-end closing checklist. Intuit's own setup help is on the QuickBooks support site.

Related guides

• S corp tax savings calculator
• Chart of accounts for a small business
• QuickBooks Online plans for small business