Tips for Simplifying Your S Corp Accounting by Stephen Nelson
An S Corporation can save your small business lots of tax. With an S corporation, for example, you typically avoid paying corporate income tax at both the federal and state level. Furthermore, with an S corporation, you also usually minimize the payroll taxes associated with shareholder-employee wages. That's the good news.
But there's bad news, too. An S corporation also often complicates your accounting. That's a bummer. Thankfully, you can often use the following tricks to un-complicate your S corporation accounting:
S Corp Accounting Trick #1: Annual Payroll for Shareholder-employees
If you're a one-man or one-woman S corporation--in other words, if the shareholder-employee is the only employee receiving wages--you can often simplify your payroll bookkeeping by processing payroll just once a year.
For example, rather than pay yourself a $3,000 a month salary, you can pay yourself a $36,000 annual salary at the end of the year.
Using an annual payroll cycle rather than, say, a monthly or biweekly cycle, reduces the number of times you need to process payroll checks and made payroll deposits. Using an annual payroll cycle also means that you'll simplify your quarterly payroll returns--for most quarters, the return will only show zeroes.
S Corp Accounting Trick #2: Over-withhold from Shareholder-employee Wages
Because an S corporation's income flows through to the shareholder's personal tax returns, the shareholders need to pay the income taxes owed on their shares of that income. That's sort of bummer because then, typically, shareholders need to make quarterly estimated tax payments.
Another trick to consider is jacking-up the federal and state income tax withholding on the shareholder's salary or wages. In other words, rather than make $3,000 a quarter estimated tax payments, the shareholder-employee could boost his or her payroll withholding by $1,000 a month or whatever.
S Corp Accounting Trick #3: Keep Cars Out of the Business
Making an S corporation the owner of a vehicle used inside the S corporation creates bookkeeping complexity. And, if you're honest about your non-business use of a vehicle, S corp ownership of the vehicle saves little tax.
Here's why: The S corporation should account for this personal auto use (using good contemporaneous records!) and then charge shareholders or employees for the use. Yuck. That's way too complicated for most small business corporations.
Many S corporations, therefore, can simplify their accounting by not putting cars inside the corporation. As an easier alternative, the S corporation can reimburse the S corp shareholder for business miles using the standard IRS mileage rate.
S Corp Accounting Trick #4: Don't Get Too Aggressive About Capitalizing Assets
Textbook accounting says that you're supposed to capitalize any assets you purchase. Those assets then appear on the balance sheet and, over time, get depreciated.
That type of bookkeeping makes sense. But you need to be careful that you don't go overboard on capitalizing assets.
Tax laws allow you to depreciate immediately (write off immediately) the costs of most assets used in a profitable business. And so you want to do that as much as you can. In other words, don't capitalize the $25 chair. Or the $150 lamp. Or even the $500 computer. Instead, write off this stuff as "office supplies" expense or use (with your CPA's help) the Section 179 election to depreciate this stuff in the year you purchase.
You should consult your certified public accountant about how you implement S corporation trick #5. But what you want to avoid is a situation where, after a few years, you have hundreds of nickel and dime items (pencil sharpeners, lamp shades and even old computers) littering your balance sheet.
About the Author
Seattle tax accountant and best-selling author Stephen Nelson specializes in small business taxation. Nelson is also the publisher of do-it-yourself S corporation guides for Florida (Visit http://www.scorporationsexplained.com/doityourself_FloridaSCorp.htm for more information) and Illinois (Visit http://www.scorporationsexplained.com/doityourself_IllinoisSCorp.htm for more information)
