Will My Bookkeeping Change as an S-Corporation?

s-corp bookkeeping

An annual directors meeting may be kept brief and concise as well, especially if you have few shareholders and they’re the same as your board of directors. An S Corp works almost like a corporation or a C Corp, but there are still many pros and cons between them that you need to consider. To learn which one would work s-corp bookkeeping best for your business, check out our article on C Corp vs S Corp. We support thousands of small businesses with their financial needs to help set them up for success. An S Corporation has high credibility among potential vendors, customers, and partners, as an S Corporation is a recognized business structure.

s-corp bookkeeping

Assuming your tax status is in order, there’s really not much difference between an S Corp and a corporation. The best part is you’ll be incorporated under state law, while still having all the same liability protection and management advantages. Keep in mind that our fee of $4,320 includes your individual tax return which you might already be paying another tax professional to prepare. WCG has a handful of clients who are right at the break-even point of $48,000 but leverage an S Corp and our services to get tax preparation, tax planning and consultation.

How do S corporation taxes work?

These shareholders must be US citizens, residents, or resident aliens. Additionally, shareholders cannot be other partnerships or corporations. These requirements could cut down on the investor pool significantly.

While in the case of a sole proprietorship, partnership, or LLC, the self-employment tax is applicable on the entire net business income. If you need help with S Corporation expenses, you can post your legal need or job on UpCounsel’s marketplace. Wajiha is a Brampton-based CPA, CGA, and Controller with 17+ years of experience in the financial services industry.

Shareholder’s Equity

For example, say a shareholder purchased $25,000 worth of stock in a C corporation in the current year. If the company earns revenue of $500,000 over the next five years that gets reallocated into the business, the shareholder’s stock basis will remain at $25,000 in each subsequent year. It doesn’t change year-over-year as an S corp shareholder basis does.

While your tax basis is $25,000 (the investment plus loan), John’s tax basis is $20,000. You and John are each given $25,000 (since you both have 100 shares of stock). Now, both you and John have increased your stock basis to $45,000 ($20,000 plus the $25,000 distribution). Your tax basis is now $50,000 ($45,000 stock basis plus the $5,000 loan basis). John’s tax basis is $45,000, which is also equal to his stock basis, since he didn’t lend any money to the corporation.

Expense Accounts

Forming an LLC and getting it taxed as an S Corp is a great way to protect personal assets in the event that your business is sued. Paying yourself a salary that is too low (or none at all) can draw scrutiny from the IRS, as it is considered an attempt to avoid paying self-employment taxes. This is a wonderful tax service for those who don’t need all the business advisory bells and whistles above, but from time to time want some love from an experienced tax consultant and business advisor.

They’re S corporations for tax purposes, but they started as either C corporations or LLCs, two structures that afford limited liability to owners. You can see from this example that cash dividends, called shareholder distributions, are essentially taxed twice. As the https://www.bookstime.com/articles/what-is-product-cost owner of a C corp, any income that makes it to your personal bank account gets taxed twice. Such changes highlight the necessity to monitor changes to tax rates and laws that could make the S corp structure less attractive compared to the regular corporate structure.

Chap 9 – Reasonable Shareholder Salary

It’s important to note that S corps don’t always triumph in the S corp vs. C corp battle. C corporation owners who prefer to reinvest earnings into the business can essentially eliminate the second layer of tax. The IRS has laid down many criteria to qualify for the S corporation status which restricts the type and number of shareholders. For example, foreigners can’t be shareholders; all the owners need to be U.S. citizens or permanent residents. Even during a transfer of ownership, the transfer can only be done to specified individuals, an estate, or trusts. As discussed earlier, shareholders split corporate income into two parts (salary and distribution).