How to Record S-Corp Distribution in QuickBooks Desktop and Online?

You need to create S-Corp accounts in QuickBooks to ensure the proper recording of distributions to shareholders, track the disbursement of funds, and stay compliant with IRS regulations.

You need to create S-Corp accounts, such as separate accounts for retained earnings, equity accounts, distinctions between owner distributions and shareholder distributions, and S-Corp distribution accounts. QuickBooks allows you to track and maintain S-Corp accounts and ensure accurate bookkeeping.

In an S-Corp you need to maintain separate accounts for the contributions made by every shareholder. Effectively managing S-Corp accounting in QuickBooks is essential for maintaining accurate financial records, ensuring tax compliance, and leveraging the benefits of the S-Corp structure. 

An S-Corp (S Corporation) is a legal business entity that allows small companies with 100 or fewer shareholders to enjoy the benefits of incorporation while being taxed like a partnership. QuickBooks simplifies the process by providing tools to track distributions, shareholder equity, income, and expenses accurately. To set up and record S-Corp distributions in both QuickBooks Desktop and Online create distribution accounts, recording transactions, and categorize income, expenses, and equity accounts to maintain a streamlined bookkeeping process while staying compliant with tax regulations.

Whether you’re recording shareholder distributions or managing payroll and equity, this guide ensures your S-Corp’s financial processes are efficient and compliant with tax regulations.

What is S-corp in QuickBooks?

An S-Corporation (S-Corp) is a tax designation granted by the IRS that allows income, losses, and deductions to pass through to shareholders, avoiding double taxation at the corporate level. This structure is often chosen for its potential tax benefits, especially for small business owners.

S-corporation is designed as a legal, commercial enterprise entity and allows a company with 100 or fewer shareholders. This structure provides the benefits of incorporation while being taxed similarly to a partnership. Shareholders must be individuals, specific traits, estates, or certain tax-exempt organizations.

How to Record S-Corp Distribution in QuickBooks Desktop?

Recording S-Corp distributions in QuickBooks Desktop ensures proper tracking and compliance with tax regulations. This type of transaction involves taking money from a bank or credit card account. It can be recorded as an expense or a liability on the balance sheet. Follow these detailed steps to set up and record these transactions accurately:

Method 1: Record the S-Corp Distribution Using Journal Entries in QuickBooks Desktop

Process 1: In Chart of Accounts, Create S Corp Distribution Accounts in QuickBooks Desktop

Setting up S Corp distribution accounts in QuickBooks is essential for accurately tracking and reporting shareholder distributions. These accounts are crucial for recording distribution to shareholders, as they allow for the proper tracking of funds disbursed from the company. These steps will help you streamline the process:

Step 1. Access the Chart of Accounts

• Open QuickBooks and navigate to the Chart of Accounts.

Step 2. Create a New Account

1. Select “New” to add an account.
2. Save account under ‘Equity.
3. Name it something specific, such as “Shareholder Distribution Account.”
4. Choose the appropriate account type to ensure proper financial reporting.

These accounts should be classified properly to ensure that distributions are correctly reported on the company’s financial statements and tax reports. By accurately setting up these accounts, recording distributions for S Corps in QuickBooks becomes more transparent and streamlined.

Step 3: Make Journal Entries

1. Go to the Company menu and select Make General Journal Entries.
2. In the journal entry screen, complete the following fields:
   • Debit the newly created “Shareholder Distribution Account” with the distribution amount.
   • Credit the cash or bank account from which the funds are being distributed.
3. Add a memo to describe the purpose of the transaction for future reference.
4. Review the journal entry to ensure accuracy, then click Save & Close.

Step 4: Monitor Total S-Corp Distributions

1. Regularly check that total distributions do not exceed the company’s accumulated earnings and profits:
   • Go to the Reports menu and run the Balance Sheet report to review retained earnings.
   • Compare retained earnings to distribution amounts.
2. Distributions exceeding profits may lead to negative tax consequences for shareholders. Always consult a tax professional if in doubt.

Step 5: Categorize S-Corp Transactions Consistently

1. If recording distributions as an expense or liability on the balance sheet:
   • Open the Expense menu and review the list of transactions.
   • Update the payee or category to align with “Shareholder Distribution” for consistency.
2. Ensure all entries reflect accurate terminology, such as “Shareholder Distribution,” rather than generic terms like “Owner Distribution.”

How to Set up S Corp Distribution Accounts in QuickBooks?

Setting up S Corp distribution accounts in QuickBooks is essential for accurately tracking and reporting shareholder distributions. These accounts are crucial for recording distribution to shareholders, as they allow for the proper tracking of funds disbursed from the company. These steps will help you streamline the process:

Steps to Set Up Distribution Accounts in QB:

Step 1. Access the Chart of Accounts

• Open QuickBooks and navigate to the Chart of Accounts.

Step 2. Create a New Account

1. Select “New” to add an account.
2. Save account under ‘Equity.
3. Name it something specific, such as “Shareholder Distribution Account.”
4. Choose the appropriate account type to ensure proper financial reporting.

These accounts should be classified properly to ensure that distributions are correctly reported on the company’s financial statements and tax reports. By accurately setting up these accounts, recording distributions for S Corps in QuickBooks becomes more transparent and streamlined.

IRS Requirements of S-Corporation

To qualify as an S Corporation, the IRS requires compliance with specific criteria:

• Eligibility: The corporation should be a domestic one, not possess 101 shareholders. All the shareholders should be American citizens or residents of America. The company cannot have more than 100 shareholders, and the shareholders can only be individuals, estates, and certain trusts; the company can have only one type of stock.
• Election: Send Form 2553, “Election by a Small Business Corporation,” executed by all shareholders on or before the 15th day of the third month of the tax year.
• Tax Filing: Every year, corporations file Form 1120-S, which includes income, deductions, and credits. They also prepare Schedule K-1 for shareholders’ tax returns.
• Reasonable Compensation: Employer-shareholders must recognize that they must offer their employees a reasonable wage that is subject to payroll tax only.
• Compliance: To avoid automatically revoking the S Corporation status, it is important to keep record books up to date, meet the state’s tax requirements, and follow the Internal Revenue Service rules.

How to File the S-Corp Taxes? 

To file S Corporation taxes, you first need to complete Form 1120-S, which reports the corporation’s income, deductions, and credits. This form is due by the 15th day of the third month (Calendar month) after the close of the tax year, for example, March 15 for calendar-year corporate taxpayers. You can File Form 1120-S online or on paper using the IRS website.

After that, the sharing of Schedule K-1 (Form 1120-S) should be provided to each shareholder with the same due dates. It presents the shareholders with their income, deductions, and credits to be declared on the personal tax returns of the corporation. Every single shareholder is required to complete a personal income tax return with respect to his share of the income.

If, in any case, there is an employee, file Form 941 quarterly for payment of payroll taxes and Form 940 annually for federal unemployment tax. Further, check for state tax regulations; some states are known to require S-Corp to meet specific filing standards.

Frequently Asked Questions:

Q 1. What are the key advantages of S-Corp accounting in QuickBooks?

Ans. S-Corp accounting in QuickBooks desktop provides benefits such as tax savings, liability protection, and streamlined bookkeeping, ensuring compliance with tax regulations and accurate financial reporting.

Q 2. How to Set Up S-Corp Medical Insurance in QuickBooks Desktop?

Setting up S-Corp medical insurance in QuickBooks Desktop involves determining the type of insurance plan you offer to your 2% shareholders and employees. Depending on the plan, you’ll need to set up specific payroll items to track and report these benefits correctly on W-2 forms. Here’s a simple guide:

Step 1: Identify the Insurance Plan Type

1. Same Plan for All Employees:
   • Use S-Corp Pd Med Premium if the 2% shareholder provides the same medical insurance plan to all employees.
   • This is taxable for federal and state withholding but exempt from Social Security, Medicare, and FUTA.
2. Different or No Plan for Employees:
   • Use Fringe Benefits if 2% shareholders have a different plan or don’t offer any plan to other employees.
   • This is fully taxable for federal, state, Social Security, Medicare, and FUTA.

Step 2: Set Up Payroll Items in QuickBooks Desktop

1. Go to Lists > Payroll Item List.
2. Click on Payroll Item > New.
3. Choose Custom Setup, then select Other Earnings.
4. Enter the appropriate name for the payroll item:
   • For same-plan benefits: Use “S-Corp Pd Med Premium.”
   • For different or no-plan benefits: Use “Fringe Benefits.”
5. Assign the correct tax tracking type:
   • Select “S-Corp Medical” for S-Corp Pd Med Premium.
   • Select “Fringe Benefits” for Fringe Benefits.
6. Set up the item’s taxability:
   • Configure as exempt or taxable based on the selected item type (refer to Step 1).

Step 3: Apply to Payroll

• Add the appropriate payroll item to the 2% shareholder’s paycheck.
• Ensure the amount is accurately recorded for W-2 reporting under Box 14.

Step 4: Verify and Report

• Double-check that your payroll setup aligns with IRS guidelines.
• At year-end, review W-2 forms to ensure Box 14 reflects the correct benefit amounts.

How to Record S-Corp Distribution in QuickBooks Online?

To record S-Corp distributions in QuickBooks Online, you transfer retained earnings to the shareholder’s equity account, and then distribute it to shareholders. This process involves writing checks and recording them against the equity account on the “Expenses” tab of the check. Since distributions reduce equity rather than being considered expenses, they won’t affect the Net Income on the Profit and Loss statement.

Step-by-Step Process to record S-Corp Distribution in QuickBooks Online:

Step 1. Create an Equity Account (if not already set up):

1. Go to the Lists menu and select Chart of Accounts.
2. Click New from the Account drop-down.
3. Choose Equity as the account type and complete the account details.
4. Click Save & Close.

Step 2. Record the Distribution:

1. Debit the retained earnings and credit the shareholder’s equity account.
2. Write a check to the shareholder:
   • Go to the “Expenses” tab on the check.
   • Assign the shareholder’s equity account for proper recording.

Step 3. Ensure Proper Categorization:

• Use the equity account for distributions so they do not impact your Profit and Loss statement.
• For business income, use a specific income account.
• Set up expense accounts for clear categorization of business expenses.

Here’s the recommended approach:

• Income Account: Create a specific income account for the S-Corp’s revenue. Use this account to record your invoiced amounts.
• Equity Accounts: Maintain the Shareholder Capital and Shareholder Distribution equity accounts as you have set them up.
• Expenses: Set up expense accounts to categorize your business expenses effectively.

Let’s walk through the process:

1. Invoice Entry: When you receive payments from clients, use the income account designated for the S-Corp’s revenue.

2. Salary Payment: Process salary payments through your ADP service. This transaction will reduce the shareholder Capital equity account and record the salary expense.

3. Distribution: Record the transaction directly from the Shareholder Distribution equity account for the shareholder distribution.

Establishing an income account allows you to generate reports on revenue specific to the S-Corp. The equity accounts monitor the flow of funds between the S-Corp and shareholders.

When running a Profit and Loss (P&L) report, the income from the designated income account, minus salaries and other business expenses, will provide a clever picture of the S-Corp taxable net income.

How to Set Up a Shareholder Distributions Account in QuickBooks Online?

Setting up a Shareholder Distributions account in QuickBooks Online helps you accurately track funds distributed to shareholders. Follow these simple steps to create this account:

Step 1: Access the Chart of Accounts

• Log in to QuickBooks Online.
• Go to Settings (gear icon) and select Chart of Accounts.

Step 2: Create a New Account

• Click on New to add a new account.

Step 3: Set the Account Type

• Choose Equity as the account type.
• Under the Detail Type, select Partner Distributions (though not technically perfect, it’s the closest option in QuickBooks Online).

Step 4: Name the Account

• Enter Shareholder Distributions as the account name.

Step 5: Save the Account

• Review the details and click Save to finalize the setup.

What is S-corp Accounting?

S-Corp records overall profits and fees at the corporate level and passes through a portion of net earnings or losses to individual shareholders. An S-Corp must maintain accurate records of each shareholder’s cash or property contributions. Their records are essential for determining each shareholder’s percentage of ownership in the company.  

Advantages of S-corp Accounting

S-Corp advantages include tax savings by avoiding self-employment taxes, better health insurance options, single taxation on income, and liability protection for personal assets.

A few advantages of S-Corp are mentioned below:

• You can save money on taxes by avoiding self-employment taxes on the portion of your income not considered salary.
• You may have access to better health insurance options as an S-Corp compared to being self-employed.
• S-Corp avoids double taxation, unlike C-corporations, which are subject to it. 
• Income from a C-corporation is texted twice before reaching your bank account, whereas an S-corp’s income is only taxed once.
• Like other forms of business entities, an S-Corp provides liability protection. This means that if something goes wrong, claims can be made against the business rather than your personal assets.

Disadvantages of S-Corp Accounting

Below are some disadvantages of S-Corp accounting:

• Involves record keeping and documentation in compliance with the Internal Revenue Service.
• Limited to 100 shareholders who are either citizens or residents of the United States of America.
• Employees are simultaneously shareholders, and so they must be paid reasonable wages, which makes payroll a challenge.
• Other taxes may be at the state level, and filing is compulsory at the state level as well.
• Profit splits may not have any relation to ownership ratios at all.

S-corp Bookkeeping In QuickBooks

Regardless of its size, an S-corp must engage in regular business transactions throughout the year to comply with state and year-end tax reporting obligations. External parties like lenders or investors may also request access to the company’s books for credit assessments. Marinating the general ledger is essential, typically requiring monthly updates to manage accounting responsibilities, with frequency adjusted based on business activity levels.

The primary duty of an S-corp involves booking to monitor revenue generation through various means, including:

1. Income: Income accounting is considered the most crucial fundamental task for an S-corp. This includes revenue from service sales, rent, interest, capital gains, and asset sales. Categorizing income by type can enhance marketing strategies effectively.

2. Sale of company assets: This section is required to record separately from income and expenditure. When utilizing accounting software, any information about assets and liabilities is reported on the balance sheet. The worth of the asset is confirmed at the time of acquisition, and the worth of the asset is equivalent to the acquisition fees required to secure the property. Record the beginning price of the obligation. Assets are modified according to depreciation, and debt payments are adjusted to liabilities.

3. Cost: This includes any expenses that the company pays because of operational and legal requirements. Goods and services paid to loans, interest rates, suppliers, wages, and taxes are a few examples of items. The company utilizes accounting software, and revenue and expense transactions will be displayed in the income statement.

4. Responsible for their seats in the company: Shareholders of an S-Corp are accountable for their ownership stakes in the company. The shareholder basis typically starts with the amount they invest to acquire shares. This basis increases with announced profits and decreases with recorded losses at year-end. The S-Corp aims to inform its shareholders about these accounting obligations.

QuickBooks, a popular accounting software, provides specialized tools and features designed to manage S Corp distributions efficiently. These tools facilitate seamless tracking and reporting, ensuring that financial records are accurately categorized and reconciled, thus streamlining the entire process.

Problems Faced by Users while S-Corp Distribution Recording

Users face several challenges when recording S Corp distributions:

• Shareholder Basis Tracking: One agrees with the author that compiling correct stock basis records is critical but goes unnoticed, thus affecting the right tax computation.
• Proportional Distribution: Overseeing and verifying distributions regarding ownership stakes may become very sensitive with many co-owners.
• Differentiating Distributions: Whatever caused this confusion between distributions, salaries, and loans, misclassification affects tax compliance.
• Software Limitations: For instance, QuickBooks requires that the data is manually input or configured, thereby, exposing the system to errors.
• Tax Implications: The key issue with misreporting distributions is that it can lead to IRS audits and penalties, further increasing the financial burden of compliance.

Final Words!

In conclusion, recording S Corp distributions in QuickBooks can be a careful process that must follow the IRS guidelines. If the distribution is classified correctly, the shareholders’ register is well managed, and the company has adequate knowledge of the legal requirements concerning taxation, the firm will be in a position not to transgress the law.

Frequently Asked Questions

Q 1. How do you Record Distributions to owners?

Ans. To record distributions to owners in QuickBooks, create an equity account labeled “Owner’s Distribution” or “Shareholder Distribution,” then record the transaction as an expense linked to this account, ensuring accurate tracking of funds distributed to owners.

Q 2. How do you report distributions on S Corp?

Ans. Dividend payments to S corporation shareholders are recorded on Form 1099-DIV and Schedule K, Line 17c. Loan repayments to shareholders are documented on Schedule K, Line 16e, and on shareholders’ Schedule K-1, Line 16, code “E.”

Q 3. Why S-Corp Owners Need to Be on Payroll?

Ans. S-Corp owners are considered employees of their business. Unlike distributions, which are not subject to Social Security and Medicare taxes, the IRS mandates that owners take a reasonable salary to ensure these taxes are properly withheld. This separates personal and business finances while ensuring compliance with federal tax regulations.

Disclaimer: The information outlined above for “How to Record S-Corp Distribution in QuickBooks Desktop and Online?” is applicable to all supported versions, including QuickBooks Desktop Pro, Premier, Accountant, and Enterprise. It is designed to work with operating systems such as Windows 7, 10, and 11, as well as macOS.