S-Corporation Year End Tasks and Bookkeeping
Please forward this page to your bookkeeper before doing the final payroll of the year.
Deadlines for S-Corporation and Partnership Returns
- IRS Deadline: S-Corp and Partnership returns are due March 15. The late filing penalty with no extension is $205 per partner per month.
- Our Deadline to receive your paperwork: Because of the complexity of these business returns, we will need your paperwork in January to avoid the need for filing an extension. (Paperwork for your personal 1040 return can come later.)
Bookkeeping and Company Chores to finish before December 31
- Be sure that S-Corp shareholders were paid "Reasonable Compensation" that will appear on the W-2.
A shareholder cannot take distributions from an S-Corp without first taking out a reasonable W-2 salary.
- Clean up "Loans" that were really distributions. Document true loans with signed notes.
- Make sure distributions to shareholders are exactly proportionate to their ownership percentage.
- Health Insurance Insurance for owner shareholders must appear on the W-2. Scroll down for details on how to do this.
This is complicated and expensive to fix if not done correctly on the W-2.
- Reimburse Shareholders and employees for personally paid travel, car mileage and other business expenses before Dec 31.
This is separate from distributions. Retain receipts.
- Prepare 1099-NEC and 1099-MISC for outside contractors paid more than $600 over the year.
Contact us no later than January 10 if you want us to create, mail and file the forms.
- Note end of year odometer readings on business use vehicles, and true up your mileage logs.
- Contact us before December 31 if your profit and loss (including depreciation) is showing a loss, especially if you made distributions.
Year End Quickbooks Cleanup and Closing of the Books
- Reconcile and balance the Bank Accounts
- Audit the liability accounts and make sure the loan balances match what the bank says.
- Print a cash balance sheet and look for any amounts that appear inaccurate. Locate and fix these items.
Look especially for negative values in A/R and A/P which signal missing transactions, such as payments received for no invoice.
- Take a second look at accounts on the balance sheet with old balances that haven't changed in some time. Can these accounts be closed out?
- Officer W-2 compensation must be reported separately from employee payroll (if any) on the annual taxes. Please break out this figure.
- Recheck your work and confirm everything is in balance and makes sense.
- Close the books for the year. This process will close (zero) out the income, expense accounts to retained earnings. These excellent short videos by Candus Kampfer will show how. Quickbooks does most of the work automatically, however there are still a few items like closing out distributions you'll need to do.
How to include S-Corp Shareholder Health Insurance on the W-2
Health insurance premiums paid by the company for its 2% shareholder-owners-employees ("Shareholders") and their dependents
must be reported as W-2 wages, not pretax benefits. This includes insurance that the shareholder purchased in their own name, which will be reimbursed.
When the W-2 is prepared correctly, these amounts are not subject to social security or medicare.
These amounts can then be deducted on the shareholder's personal 1040 to claim the valuable Self-Employed Heath Insurance Deduction.
- This must be entered on the W-2's issued in January. W-2's will need to be amended if this is forgotten.
- The deduction cannot exceed the amount of W-2 wages paid. If this exceeds wages, you will have a negative W-2.
- The shareholder cannot take this insurance deduction if they or their spouse is eligible for employer-subsidized
health insurance, whether or not they choose to take it.
- If the rank and file employees are excluded from the health plan, the wages will become subject to social security and medicare withholding.
Bookkeepers: Note the reduction in Social Security and Medicare wages to
match the $5000 Health Insurance expenditure on behalf of the shareholder. There is also a notation in box 14.
See the links below to see how to set this up in Quickbooks.
Reimbursing the Shareholder if they personally paid for the insurance
If the shareholder buys a policy in their own name and personally makes the payments, the S-Corp must reimburse, then include these amounts as W-2 wages not subject to Social Security or Medicare. This is then deducted on the personal return as described above. Docs describing the arrangement and receipts for amounts reimbursed should be kept in the corporate files. Reimbursements must be made before the end of the year.
Shareholder has Medicare
Premiums for all parts of Medicare qualify as Health insurance that the S-Corp can reimburse.
These reimbursements must be reported to the Shareholder as wages on Form W-2 as described above.
The employee will then take the self-employed health insurance deduction on their personal taxes. Reimbursements must be made before the end of the year.
ACA Marketplace (Obamacare) premiums paid by the Shareholder
Shareholders may also be reimbursed for premiums for policies purchased on the ACA marketplace. The amount that can be deducted has a complicated circular relationship with advance subsidies given to reduce the monthly cost of premiums. We strongly suggest that shareholders regularly check and adjust the marketplace monthly insurance subsidy and carefully craft the final end of year reimbursement. This is especially important if your S-Corp income fluctuates. Reimbursements must be made before the end of the year.
Links / References
Overview of closing entries from Quickbooks
Cliff Notes on bookkeeping closing entries
Bookkeeping Closing Entries
Medical Insurance on the W-2
Quickbooks: How to set up S-corporation medical payroll items
Gusto 2% Shareholder Benefits (second to last dropbown)
Quickbooks: Apply S Corp Medical at year end for corporate officers
This article is a simplification of the rules. Please refer to IRS Notice 2008-1 or call us for full details.