S corporation tax returns represent a both a big chunk of work as well as a big tax saving opportunity for small businesses. Accordingly, we'll talk briefly about what work you and your bookkeeper or accountant need to do in order to prepare an S corporation tax return.
Typical S Corporation Tax Returns Required
As compared to a sole proprietorship or a one-member limited liability company operating as a sole proprietorship for tax purposes, an S corporation requires quite bit of additional tax accounting.
The first bit of tax accounting required for an S corporation is payroll accounting for the corporation's employees. As a general rule, an active S corporation must pay its employee a reasonable wage. This requirement remains true even when the S corporation has a single employee who happens to be sole shareholder of the corporation.
At a federal level, payroll accounting requires an S corporation to file quarterly 941 payroll tax returns which report on the wages paid to employees, the Social Security and Medicare taxes that the employer owes on those wages, and the taxes withheld from the employee's gross wages for federal income taxes, Social Security taxes, and Medicare taxes. S corporation payroll accounting also requires the filing of an annual 940 payroll tax return to report and pay federal unemployment tax (also known by the acronym FUTA). Finally, S corporation payroll requires the preparation and distribution of W-2 and W-3 forms which report to employees, the Social Security Administration, and (indirectly) to the Internal Revenue Service what wages and taxes an employer has paid over the year.
You can get forms and instructions for all of these payroll accounting tasks from the Internal Revenue Service web site, www.irs.gov. You can also often get forms and sometimes instructions from the local office supplies store and from your accounting software provider (such as the Intuit QuickBooks folks).
Bookkeeping Preparation for an S
Corporation Tax Return
If an S corporation generates revenues of less than $250,000 a year and owns total assets of less than $250,000, the only real bookkeeping work required in order to prepare an S corp is the generation of a simple profit and loss statement.
If you're using an accounting program such as Quicken or QuickBooks, you can probably prepare the profit and loss statement by clicking a menu command. The command will usually be entitled something like "profit-and-loss statement" or "income statement".
A couple of tips, however, about generating this profit and loss statement should be made. Be sure to reconcile your bank accounts before you produce the profit and loss statement. (This reconciliation will quite possibly catch and correct any bookkeeping errors you have made over the year.) Also, be sure to tell the tax return preparer about any expenditures that don't appear on your profit and loss statement; for example, if you purchased assets that need to be depreciated and those assets don't appear on the income statement.
If you aren't using an accounting program (and some small-service businesses can get by with a shoebox-style accounting system), you can use an Excel workbook or even columnar paper to construct a simple table of income and expenses.
Suppose, for example, that a small business has the following items:
- Receipt of $100,000 of consulting revenue
- Payment of $40,000 in shareholder-employee wages
- Payment of $3493 in associated payroll taxes
- Payments to Staples totaling $5000 over the year for office supplies
- Payments to the CPA for tax accounting services over the year for $2000
- Purchase of a laptop computer (which cost $3000)
- Payment of the client's personal car loan ($5000)
- Payment of $40,000 of dividends to owner
You might in this situation build a profit and loss statement that looks like this: