What Are the Accounting Requirements for an S-Corp?

Many business owners choose an S Corporation for its tax advantages, but few realize how much upkeep is involved until they’re already in it. It’s not that S Corp accounting is overly complicated—but it does require more structure and consistency than other business types. Miss a few key steps, and you could lose the very tax benefits that made you choose an S Corp in the first place.

If you're an S Corp owner (or thinking of becoming one), here are the core accounting requirements you need to stay on top of:

1. Balance Sheet Reporting.

S-Corps are required to prepare a formal balance sheet as part of their annual tax return filing (Form 1120S) if their total assets or receipts exceed $250,000.

What does that mean in practical terms? Well, it means full-on bank reconciliations, which to be honest, are a tedious and boring for most of us. But only through bank reconciliations you can create an accurate balance sheet that shows your assets and liabilities. It is hard to reconstruct a balance sheet without doing bank reconciliations (well, many of us CPAs can still do it—but we charge extra for that kind of cleanup, since it takes a higher level of accounting and tax knowledge).

Tools like QBO or Xero can help automate much of this, but the process still trips up many business owners—especially if there are multiple bank accounts, transfers, or multiple source of income. That’s why many eventually outsource this work to a bookkeeper.

⚠️ Important: If you need to show the balance sheet on your S Corp tax return, the balance sheet from current year must match the ending balance sheet from the last year. Any discrepancy requires backtracking through the books to reconcile any sort of changes between periods.

If you’re used to running a single-member LLC on Schedule C, bank reconciliations will feel like an overkill. As a Schedule C filer you can often slap together a profit & loss from your bank statements in under an hour. With S Corps? Not so simple.

2. Shareholder Distributions Must Be Tracked Separately.

One of the biggest accounting differences with an S Corp is how it handles money paid to shareholders. Unlike sole proprietorships or LLCs, you can’t just take draws from the account and call it a day.

You’re required to pay yourself a reasonable salary, reported on a W-2, and subject to payroll taxes. Any additional money you take out of the business is considered a distribution, which is not subject to self-employment tax—but it still needs to be tracked.

Why does this matter? Because every distribution affects your shareholder basis. If you take out more than your basis allows, it could trigger capital gains taxes.

At a minimum, you should be tracking:

1. How much in distributions you’re taking (non-W-2)

2. Any capital contributions you’ve made

We usually track basis in a good ol’ Excel sheet. It’s simple, but it works—and QuickBooks won’t do it for you.

3. Retained Earnings Rollforwards and Reconciliation.

Retained earnings is another area where S Corp bookkeeping becomes more demanding. S Corps must maintain good records of shareholder equity, including changes in capital contributions, distributions, and retained earnings, with retained earnings being the most difficult accounting task.

At the end of the year, the retained earning accounts need to be reconciled. This becomes complex if there are multiple shareholders or changes in ownership during the year. From a tax perspective, retained earnings must “roll” from year to year. Meaning: Prior year retained earnings + current year income– current year distributions = end of year retained earnings

If that math doesn’t work, something is off and needs to be fixed. You can read more about retained earnings in S Corps here.

4. Payroll and W-2 Reconciliation

Let’s not forget about the concept of reasonable compensation. Just like anything tax-related, it has to be backed up with documents.

The IRS expects business owners issue themselves a W-2 and pay the appropriate Social Security and Medicare taxes along with it. Also, if the owner wants to deduct their health insurance, it has to be shown on their W-2 as well.

What does this mean to the owner? Well, someone must do the payroll, right?

Doing payroll is time consuming. It requires filing four quarterly payroll forms throughout the year and some final paperwork in January of the next year. Plus, your bookkeeper or CPA needs to reconcile employer federal taxes—and that can get messy. Often, the employer and employee portions of taxes get mixed up, and since the employee portion is not deductible for the IRS purposes, someone would need to manually back it out from accounting records.

5. Accountable Plans and Their Reconciliation.

If you’re reimbursing yourself for business expenses such as home internet, mileage, phone, or a home office, you need a formal reimbursement policy, or, as the IRS calls it, “an accountable plan”. The IRS does not allow you to pay for these expenses directly from the S Corp's business account.

You must pay for these expenses out of your personal account, document the spending (receipts, mileage logs, etc.), submit them back to the S Corp for review, and have the S Corp reimburse you from its business bank account. If you just pay your personal bills through the business account, you’re doing it wrong. Your CPA will disallow those expenses at tax time and classify them as distributions instead. You can read up on accounting for accountable plans here.

The Bottom Line

The good news? Accounting for S Corps is not a rocket science; you just need to be consistent with it. The accounting basics remain the same—you still need profit and loss statements and, ideally, a balance sheet.

Just Don't Forget About Additional Tweaks For S Corps:

• Tracking shareholder basis

• Doing payroll and filing W-2

• Tying out retained earnings

• Properly tracking your accountable plan

Tips to Keep Up with Your S Corp Accounting:

1. Consider Outsourcing Payroll

Even if you’re the only employee, you still have to run payroll and withhold taxes. Payroll taxes are complicated, and even a small error could trigger an audit or penalties. Using a payroll service like Gusto, ADP, or Paychex can help you avoid extra headaches. And even if they make a mistake, they will fix it for free.

2. Use Cash Basis Accounting If You Can

Cash basis is simpler because you record income and expenses when the money actually moves. While accrual accounting is more precise, it’s also theoretically more complex. In our experience, most small businesses use cash basis, unless they want (and actually know how) to time their revenue for tax planning purposes. Here is more on the topic of cash vs accrual accounting.

3. Get Bookkeeping Coaching

To be honest, your CPA probably won’t run your QuickBooks (in most cases bookkeeping is just not very lucrative for CPAs), but they can coach you through the basics if you pay them for an hour or two of their time. Eventually, this training will pay off. The cleaner your books, the less your CPA will charge you.

And if you're still overwhelmed, please check out our services! At our CPA firm, we handle all of it: bookkeeping, tax prep, and tax strategy. It’s what we do every day. This all-in-one approach saves you time and helps you take full advantage of the tax-saving strategies S Corps offer.