Financial statements don't appear by magic. They are the final product of a structured, repeatable process known as the accounting cycle. While the principles are universal, the tools you use can dramatically change the experience. This guide walks you through the accounting cycle with a focus on Beancount, the powerful plain-text accounting tool.

We'll see how Beancount's text-first approach eliminates tedious steps, what you should automate, and which reports give you the clearest picture of your financial health. 🧑‍💻

TL;DR: The Beancount Workflow​

• Capture & Journal: Record every transaction as a clean, double-entry posting in your .beancount text file.
• Validate & Reconcile: Use balance assertions to confirm your ledger matches bank statements and run bean-check to catch errors.
• Review: Generate an unadjusted trial balance for a quick sanity check.
• Adjust: Post entries for accruals, deferrals, depreciation, and other period-end items.
• Re-review: Check the adjusted trial balance to ensure everything is correct.
• Publish & Close: Generate your Income Statement, Balance Sheet, and Cash Flow statement. Closing the books is optional in Beancount, as reports are date-aware.

This flow can be visualized like this:

Step 1: Capture and Record Transactions​

This is the foundational step. Every financial event—a sale, a purchase, a bank fee—must be recorded. In Beancount, you do this by creating transactions in a simple text file, typically named main.beancount or organized into multiple files by year.

Each transaction must follow the rules of double-entry bookkeeping, meaning the sum of all postings must be zero. Beancount enforces this for you.

2025-08-10 * "Walmart" "Purchase of office supplies"
  Expenses:Office:Supplies      45.67 USD
  Assets:Bank:Checking         -45.67 USD

• Pro-Tip: Use tags like #project-phoenix or #client-acme to add dimensions to your data. This makes querying and reporting incredibly flexible later on.

Reconciliation Hygiene ✅​

The most powerful feature for ensuring accuracy is the balance assertion. At the end of a statement period (e.g., end of the month), you declare what the balance of an account should be.

2025-08-31 balance Assets:Bank:Checking  12345.67 USD

If the sum of all transactions affecting Assets:Bank:Checking up to that date doesn't equal 12345.67 USD, Beancount will raise an error. This simple directive turns your ledger into a self-auditing document.

For those backfilling historical data, the pad directive can automatically create a balancing transaction to make your opening balances match your first assertion.

Step 2: "Post to the Ledger" (A Freebie!)​

In traditional accounting systems, you first write entries in a "journal," and then a separate "posting" step copies those values to the "general ledger."

With Beancount, your .beancount file is both the journal and the ledger. When you write and save a transaction, you've already posted it. There is no separate step. This directness is a core advantage of plain-text accounting—what you see is what you get.

Step 3: Prepare an Unadjusted Trial Balance​

Before you start making adjustments, you need a quick "does this all add up?" check. A trial balance is a simple report that lists every account and its total balance. The grand total of all debit balances must equal the grand total of all credit balances.

You can generate this with a simple query:

bean-query main.beancount \
  "SELECT account, sum(position) GROUP BY 1 ORDER BY 1"

Or, for a more visual approach, open your ledger in Fava (the web interface for Beancount) and navigate to the "Trial Balance" report. Look for anything unusual—an asset account with a credit balance, or an expense account with a strange value.

Step 4: Book Adjusting Entries​

Adjusting entries are crucial for accurate reporting under the accrual basis of accounting. They ensure that revenues are recognized when earned and expenses are recognized when incurred, regardless of when cash changes hands.

Common adjustments include:

• Accruals: Recording revenue you've earned but haven't invoiced yet, or an expense you've incurred but haven't paid.
• Deferrals: Handling prepayments. If a customer pays you for a year of service upfront, you book it as a liability (Liabilities:UnearnedRevenue) and recognize 1/12th of it as income each month.
• Non-Cash Items: Recording things like depreciation of assets.
• Corrections: Fixing errors or accounting for missed items from bank feeds, like a small interest payment.

Example: Accruing Revenue​

You finished a project on August 31st but won't send the invoice until September. To recognize the income in the correct period (August), you make an adjusting entry:

2025-08-31 * "Accrue revenue for client project #1042"
  Assets:AccountsReceivable      3000.00 USD
  Income:Consulting             -3000.00 USD

Example: Recording Depreciation​

Your company has a depreciation schedule for its assets. At the end of the period, you book the expense:

2025-12-31 * "Annual depreciation on computer equipment"
  Expenses:Depreciation                  4800.00 USD
  Assets:Fixed:AccumulatedDepreciation  -4800.00 USD

Step 5: Run an Adjusted Trial Balance & Validate​

Once your adjusting entries are in, run the trial balance report again. This is your Adjusted Trial Balance. It provides the final set of numbers that will be used to create the financial statements.

This is also the perfect time to run Beancount's built-in sanity check:

bean-check main.beancount

This command verifies all syntax, balancing rules, and assertions. If it runs without any output, your books are mechanically sound.

Step 6: Publish Financial Statements 📊​

This is the payoff. Using the numbers from your adjusted trial balance, you can now generate the key financial reports. Fava is the easiest way to do this, as it provides interactive, drill-down reports out of the box.

• Income Statement (Profit & Loss): Shows your revenues and expenses over a period, resulting in your net income or loss.
• Balance Sheet: A snapshot of what you own (Assets) and what you owe (Liabilities), as well as your net worth (Equity), on a specific date.
• Cash Flow Statement: Reconciles your starting cash with your ending cash by showing where money came from and where it went.

For custom reports, you can use Beancount Query Language (BQL). Here’s a query for a monthly income statement:

-- P&L for August 2025
SELECT account, sum(position)
WHERE account ~ '^(Income|Expenses)'
  AND date >= 2025-08-01 AND date <= 2025-08-31
GROUP BY account ORDER BY account;

Step 7: Closing the Books (Optional)​

In traditional accounting, the "closing" process involves creating journal entries to zero out all temporary accounts (Income and Expenses) and transfer the net income into an equity account called Retained Earnings. This formally resets the temporary accounts for the next year.

In Beancount, this step is usually unnecessary. Fava's reports are date-aware; if you ask for a 2025 P&L, it will only use 2025 data. The balances don't "spill over." Most users simply leave the balances as they are.

However, if you need to perform a formal close for compliance or shareholder reporting, you can do so with a simple year-end transaction that moves the total income and expense balances into Equity:Retained-Earnings.

A Practical Monthly Close Checklist​

Here’s a repeatable checklist to close your books each month using Beancount.

• Capture: Import all bank and credit card transactions. Manually enter any cash expenses or out-of-band items.
• Reconcile: Add balance assertions for all bank accounts, credit cards, and loan accounts, matching them to your statements.
• Review: Scan the unadjusted trial balance in Fava. Investigate any strange or unexpected balances. Check for stale unpaid invoices (Assets:AccountsReceivable) or bills (Liabilities:AccountsPayable).
• Adjust: Book entries for accrued revenue/expenses, deferred revenue, and any necessary corrections.
• Validate: Run bean-check. Review the final adjusted trial balance.
• Publish: Generate the P&L and Balance Sheet. Send them to stakeholders or save them for your records.
• Wrap-up: Optionally, perform a closing entry if your business requires it. Archive a copy of your .beancount files for the period.

Why Beancount Shines for the Accounting Cycle​

• Transparency and Auditability: Your ledger is a text file. You can use git to version control your financial history, review changes with diff, and collaborate with your accountant in a clear, unambiguous format.
• Total Control: You define your chart of accounts. You aren't locked into a software vendor's structure. Your data is yours, forever, in an open format.
• Unmatched Power: The combination of SQL-like queries (BQL) and a rich web interface (Fava) gives you unparalleled power to slice, dice, and understand your financial data.

Copy-Paste Snippets to Get Started​

Simple Chart of Accounts:

option "title" "My Personal Ledger"
option "operating_currency" "USD"

;; --- Accounts ---
1970-01-01 open Assets:Bank:Checking
1970-01-01 open Assets:AccountsReceivable
1970-01-01 open Liabilities:CreditCard
1970-01-01 open Liabilities:UnearnedRevenue
1970-01-01 open Equity:Owner:Capital
1970-01-01 open Equity:Retained-Earnings
1970-01-01 open Income:Consulting
1970-01-01 open Expenses:Office:Supplies
1970-01-01 open Expenses:Software
1970-01-01 open Expenses:Depreciation

Useful BQL Query:

-- Find all customers with an outstanding balance
SELECT payee, sum(position)
WHERE account = 'Assets:AccountsReceivable'
GROUP BY payee
HAVING sum(position) > 0
ORDER BY sum(position) DESC;

By mapping the timeless accounting cycle to Beancount's modern, text-based tools, you gain a system that is robust, transparent, and built to last. Happy bookkeeping!

We're excited to announce a major enhancement to the Beancount.io ecosystem: the official integration of beancount-dashboard. This powerful new feature brings a suite of rich, interactive visualizations directly into Fava, allowing you to see your financial story in a clear, compelling, and actionable way.

What is beancount-dashboard?​

beancount-dashboard is an open-source plugin for Fava, the web interface for Beancount. It transforms your plain-text financial data into dynamic and insightful dashboards, making it easier than ever to understand your financial health and make informed decisions.

The plugin provides a wide range of powerful visualizations:

• 📊 Comprehensive Asset Views: Track your wealth with a Net Worth Line Chart, monitor performance with detailed Portfolio Tracking, and visualize your distribution with Asset Allocation pie charts.
• 💰 Income & Expenses Analytics: Understand your cash flow with precision. Analyze Monthly Averages, break down spending by Category, and see how your habits have changed with Year-over-Year Analysis.
• ✈️ Travel Cost Management: Track annual travel costs and analyze spending patterns by destination to budget more effectively for future trips.
• 🔄 Sankey Diagrams: Visualize the flow of your money with interactive charts that show how funds move between income sources, accounts, and expense categories.
• 📈 Financial Projections: Plan for the future by using your historical data to set goals and project your financial trajectory.

Why We Integrated beancount-dashboard​

This integration is a game-changer for the Beancount community, offering four key benefits:

1. Enhanced User Experience​

Beancount is built on a robust foundation of double-entry bookkeeping, but raw data can be overwhelming. The beancount-dashboard plugin transforms complex ledgers into intuitive visualizations, making financial management accessible and engaging for everyone.

2. Better Financial Decision Making​

Visual dashboards empower you to make smarter financial choices. They help you identify trends, optimize budgets, track goals, and plan ahead with confidence by presenting your data in an easy-to-digest format.

3. Professional-Grade Analytics​

This integration brings enterprise-grade analytical power to your fingertips. Powered by Apache ECharts, the dashboards offer interactive charts, custom views, and real-time updates that reflect your latest transactions. Its responsive design ensures a seamless experience on any device.

4. Open-Source Excellence​

Both Beancount and beancount-dashboard are committed to open-source principles. This means you get complete transparency in how your data is handled, the assurance of privacy (since your data stays on your own infrastructure), and the support of an active and innovative community.

Real-World Benefits​

This integration provides immediate and tangible benefits for various users:

For Personal Finance:​

• Budgeting: See exactly where your money goes each month.
• Savings Goals: Visualize your progress toward an emergency fund, a vacation, or retirement.
• Investment Monitoring: Keep a close eye on your portfolio performance and asset allocation.

For Small Businesses:​

• Cash Flow Management: Monitor business liquidity and understand cash flow patterns.
• Expense Analysis: Analyze business costs by department, project, or vendor.
• Financial Planning: Use historical data for more accurate budgeting and forecasting.

For Financial Advisors:​

• Client Presentations: Create professional, easy-to-understand financial reports.
• Portfolio Analysis: Conduct comprehensive asset allocation and performance tracking.
• Compliance: Maintain detailed and accessible records for auditing and reporting.

Ready to Transform Your Financial Life?​

Your journey to better financial management starts now. With the power of beancount-dashboard, you have all the tools you need to take control of your finances.

1. Visit beancount.io
2. Create your free account to access the complete Beancount ecosystem.
3. Join thousands of users already managing their finances with confidence.

We Want Your Feedback​

Your insights are invaluable as we continue to refine our platform. Help us improve by sharing your dashboard success stories, feature requests, and any bug reports you encounter. You can connect with the Beancount.io team through our Community Forums, GitHub Issues, or on social media.

Join a Thriving Community​

Connect with fellow Beancount users to share dashboard configurations, learn from experts, and contribute your own knowledge. Stay updated on new features and help shape the future of financial management.

This integration represents a significant step forward. By combining Beancount's robust accounting engine with the powerful visualizations of beancount-dashboard, we are providing enterprise-grade analytics in an open-source, privacy-focused package.

Ready to revolutionize your financial tracking? Register at beancount.io today, experience the power of beancount-dashboard, and help us build the future of financial management together!

Choosing the right business entity is one of the most critical decisions a founder makes. It impacts your taxes, your ability to raise money, and your administrative workload. Two of the most common structures for incorporated businesses are the C corporation and the S corporation. What’s the difference, and which one is right for you?

TL;DR​

C corporations are taxed at the corporate level, and shareholders are taxed again when they receive dividends—a system known as double taxation. S corporations are "pass-through" entities, meaning profits are taxed just once on the owners’ personal tax returns, but they come with strict ownership limits. If you plan to reinvest heavily and raise venture capital, the C corp is often the cleaner, more scalable choice. If you're a profitable, owner-operated business and want to distribute cash while paying yourself a reasonable salary, an S corp can significantly lower your tax bill.

Either way, Beancount.io is built to keep your books clean with plain-text, auditable entries and export-ready financials that make tax time a breeze.

Quick Comparison​

Note: The federal corporate income tax is a flat 21%. However, state rules for both C corps and S corps vary widely. Always verify the tax treatment in your state of incorporation and operation.

What is a C Corporation?​

A C corporation is the standard, default corporate structure in the United States. When you file articles of incorporation with a state, you create a C corp unless you elect otherwise. This structure provides limited liability protection for its owners (shareholders), requires formal governance (a board of directors, officers, bylaws), and creates a legal entity that investors and banks recognize and understand.

How C Corps Are Taxed​

C corps have a distinct tax identity. They file their own corporate tax return, IRS Form 1120, and pay taxes on their net income at the corporate level. If the corporation then distributes its after-tax profits to shareholders in the form of dividends, those shareholders must report that dividend income on their personal tax returns and pay taxes on it again. This is the "double taxation" C corps are known for.

Why Choose a C Corp?​

• Fundraising & Equity: This is the biggest draw for startups. C corps can issue multiple classes of stock (e.g., common and preferred), which is essential for venture capital deals. Structuring option pools, SAFEs, and convertible notes is straightforward.
• Reinvestment: If you plan to plow all your profits back into growing the business, you can avoid the second layer of tax by simply not paying dividends. The profits are taxed once at the corporate rate and remain in the company.
• Signaling: For better or worse, incorporating as a Delaware C corp signals to investors that you intend to build a venture-scale company.

Drawbacks of a C Corp​

• Double Taxation: The primary disadvantage. If you plan to distribute profits regularly, you’ll pay tax twice on the same dollar.
• Administrative Burden: C corps come with more compliance requirements, including holding board meetings, maintaining corporate minutes, and handling more complex state and federal filings.
• Limited Deductions: Certain tax credits and deductions available to individuals or pass-through entities are not available at the corporate level.

What is an S Corporation?​

An S corporation is not a different type of legal entity but rather a special tax election made with the IRS. A domestic corporation (or an LLC that elects to be taxed as a corporation) can file to become an S corp, which allows it to be treated as a pass-through entity for federal tax purposes.

Eligibility Snapshot​

To qualify for and maintain S corp status, a company must meet strict criteria:

• Have no more than 100 shareholders.
• All shareholders must be U.S. individuals, certain trusts, or estates. No corporations, partnerships, or non-resident aliens can be shareholders.
• Have only one class of stock economically. (Differences in voting rights are allowed, but all shares must have the same rights to profits and assets).
• Not be an ineligible corporation, such as a bank or insurance company.
• You must file Form 2553 on time. For an existing business, this is generally by the 15th day of the third month of the tax year (March 15th for a calendar-year business).

Why Choose an S Corp?​

• Single Layer of Tax: Profits and losses "pass through" the business directly to the owners' personal tax returns, reported via a Schedule K-1. The corporation itself does not pay federal income tax.
• Self-Employment Tax Savings: This is a key benefit. Owner-employees must pay themselves a "reasonable salary," which is subject to FICA taxes (Social Security and Medicare). However, any additional profits can be paid out as distributions, which are not subject to self-employment taxes.

Drawbacks of an S Corp​

• Strict Rules: The ownership restrictions are rigid. Accidentally violating one (e.g., selling stock to an ineligible shareholder) can lead to an "inadvertent termination" of S corp status, which can have messy tax consequences.
• "Reasonable Compensation" Scrutiny: The IRS pays close attention to whether the salary paid to owner-employees is reasonable. Paying yourself an artificially low salary to maximize tax-free distributions is a major red flag for an audit.
• State Variability: Not all states recognize the S corp election. Some tax S corps as if they were C corps, or they may impose a separate entity-level tax, partially negating the federal tax benefit.

Which Should You Pick?​

The decision boils down to your goals for ownership, funding, and cash flow.

Consider a C corp if you expect to:

• Seek institutional investment from venture capitalists.
• Create different classes of stock for founders and investors (e.g., preferred shares).
• Use complex equity instruments like SAFEs or convertible notes.
• Have non-U.S. owners, either now or in the near future.
• Reinvest profits for several years before taking significant cash out of the business.

Consider an S corp if you:

• Are 100% owned by U.S. individuals who meet the criteria.
• Are already profitable and want to distribute cash to owners efficiently.
• Can confidently run payroll and pay owner-operators a defensible, market-rate salary.
• Do not need complex equity classes for different types of owners.

If you’re unsure, many businesses start as a Delaware C corp to maintain maximum flexibility. You can evaluate making an S corp election later if your profitability and ownership structure make it advantageous.

Beancount.io: How Your Books Differ (with Examples)​

Whether you choose a C or S corp, Beancount.io’s plain-text ledger makes the flow of money for taxes and equity explicit and auditable. Here are a few examples illustrating the key differences in your journal entries.

1) C Corp: Accruing and Paying Corporate Income Tax​

A C corp is responsible for its own income tax. You'll accrue this liability and then pay it.

2025-03-31 * "Accrue federal corporate income tax for Q1"
  Expenses:Taxes:Income            12500.00 USD
  Liabilities:Taxes:Federal       -12500.00 USD

2025-04-15 * "Pay Q1 2025 federal estimated tax"
  Liabilities:Taxes:Federal        12500.00 USD
  Assets:Bank:Checking            -12500.00 USD

2) C Corp: Paying a Dividend vs. Retaining Earnings​

When a C corp distributes profits, it's a dividend. This is a reduction of equity, not an expense.

2025-06-30 * "Board declares and pays cash dividend"
  Equity:Dividends                 50000.00 USD
  Assets:Bank:Checking            -50000.00 USD

If you retain the earnings instead, you simply don’t post this transaction. The profit stays in your Equity:RetainedEarnings account.

3) S Corp: Reasonable Salary & Payroll Taxes​

S corp owners must be paid a salary. This is a standard payroll expense, complete with employer-side taxes.

2025-01-31 * "Owner payroll (gross wages and employer taxes)"
  Expenses:Payroll:Wages            8000.00 USD  ; Gross salary
  Expenses:Payroll:EmployerFICA      612.00 USD  ; Employer portion of taxes
  Liabilities:Payroll:Federal       -2000.00 USD  ; Withholding + FICA
  Liabilities:Payroll:State           -400.00 USD  ; State withholding
  Assets:Bank:Checking              -6212.00 USD  ; Net pay to owner

2025-02-15 * "Remit payroll taxes to agencies"
  Liabilities:Payroll:Federal        2000.00 USD
  Liabilities:Payroll:State           400.00 USD
  Assets:Bank:Checking              -2400.00 USD

4) S Corp: Owner Distribution​

This is how profits beyond salary are paid out in an S corp. Notice it is not an expense. It's a direct draw from equity, similar to a dividend, but with different tax implications for the owner.

2025-03-15 * "Owner distribution (profit pass-through)"
  Equity:Distributions:OwnerA       20000.00 USD
  Assets:Bank:Checking             -20000.00 USD

The owner receives a Schedule K-1 detailing their share of the company's profit and handles the tax on their personal return.

Chart-of-Accounts Tips​

• Taxes:
  • C corp: You'll need Expenses:Taxes:Income and Liabilities:Taxes:Federal.
  • S corp: This income tax account is often unused at the federal level, but accounts for payroll taxes (Expenses:Payroll:Taxes and Liabilities:Payroll:*) are essential.
• Equity:
  • C corp: A standard setup includes Equity:CommonStock, Equity:AdditionalPaidInCapital, Equity:RetainedEarnings, and Equity:Dividends.
  • S corp: Your chart will look similar but often uses Equity:Distributions instead of dividends. Some track Equity:AAA (Accumulated Adjustments Account) to manage distribution basis.
• Payroll:
  • Both structures will need robust Expenses:Payroll:* and Liabilities:Payroll:* accounts if they have employees (including owner-employees).

Required IRS Forms (Common Cases)​

• C corp: Form 1120 (Annual Income Tax Return), Form 1120-W (Estimated Tax), Form 941 (Quarterly Payroll), Form 940 (Annual Unemployment/FUTA), Form 1099-DIV (for each shareholder receiving dividends), W-2/W-3.
• S corp: Form 1120-S (Annual Income Tax Return), Schedule K-1 (for each shareholder), Form 941/940, W-2/W-3.
• States: Remember that separate state income, franchise, and payroll tax returns will likely apply to both.

FAQ Quick Hits​

• Can an LLC be an S corp? Yes. An LLC can file Form 8832 to elect to be taxed as a corporation, and then file Form 2553 to elect S corp status (assuming it meets all eligibility rules).

• Is an S corp “always cheaper” for taxes? Not necessarily. The benefit depends entirely on your profit levels, the owner's reasonable salary, state tax laws, and the individual owner's tax bracket.

• Can S corps have preferred stock? No, not in an economic sense. S corps can only have one class of stock. You can have different voting rights (e.g., voting and non-voting common stock), but all shares must have identical rights to distributions and liquidation assets.

• Can I switch from one to the other later? Yes, but it can be complex. Converting from a C corp to an S corp is common, but you must be mindful of timing and potential built-in gains (BIG) tax rules. Converting from an S corp to a C corp is also possible and often required before a VC funding round.

How Beancount.io Helps​

No matter which entity you choose, Beancount.io provides the clarity and control you need.

• Plain-text, version-controlled books that scale from a single-owner S corp to a venture-backed C corp.
• Clear payroll and equity workflows that make it easy to distinguish distributions from dividends, track stock option expenses, and manage retained earnings.
• Clean exports for your CPA, including a trial balance, income statement, and balance sheet, with a fully auditable trail for every number.
• Powerful automations for bank feeds and document capture, without ever sacrificing the transparency of a human-readable ledger.

Want a head start? Ask for our sample C-corp and S-corp Beancount charts of accounts and example journal bundle.

*Disclaimer: This guide is for informational purposes only and does not constitute legal or tax advice. Tax laws and entity regulations vary by state and are subject to change. You should consult with a qualified CPA or attorney before choosing or changing your business entity type.*

For decades, the world of business accounting has been dominated by a familiar cast of closed, GUI-based systems like QuickBooks, Xero, and FreshBooks. They have set the standard, offering ease-of-use and visual workflows that cater to non-technical users. But for developers, power users, and anyone who values absolute transparency and control, a radically different approach has emerged: Beancount.io.

This article provides a direct comparison of Beancount.io with traditional accounting software. We'll break down their core differences in philosophy, flexibility, cost, and long-term maintainability to help you decide which system truly fits your needs.

1. Philosophy and Workflow​

The most fundamental difference between these two approaches lies in their core philosophy.

Beancount.io Beancount.io is built on the philosophy of plain-text accounting. At its heart, every single financial transaction is an entry in a simple text file. This "accounting as code" model prioritizes human-readable, version-controllable records. Your financial data lives in a timeless, open format that you own completely—it can never be locked away by a vendor. This workflow is designed for users who are comfortable with code editors, version control systems like Git, and command-line tools.

Traditional Software Traditional accounting platforms are GUI-based and form-driven. You enter data using wizards, dropdown menus, and visual forms. This approach prioritizes immediacy and accessibility, making it easy for non-technical users to get started without a steep learning curve. However, your data is stored in a proprietary format or a cloud database, often requiring complex export and import procedures if you ever decide to migrate to another service.

Verdict: If you prioritize full control, data ownership, transparency, and automation, Beancount.io is the clear winner. If you need a "click and go" interface with a minimal learning curve, traditional software will feel more natural.

2. Flexibility and Customization​

How well can the software adapt to your specific needs?

Beancount.io Being 100% scriptable is Beancount.io’s superpower. It integrates seamlessly with Python, allowing you to connect to any API, automate data fetching from bank feeds, programmatically tag transactions based on complex rules, and generate custom reports tailored to your exact specifications. Your ability to extend and customize is practically infinite, free from any vendor-imposed limitations.

Traditional Software These platforms offer a curated selection of integrations with popular tools like PayPal, Stripe, and various payroll services. While convenient, you are operating within the vendor's walled garden. Customization is limited to what the platform allows, and advanced reporting or automation often requires upgrading to a higher-tier plan or purchasing third-party add-ons. You can work with their APIs, but you'll always be bound by their ecosystem's rules and rate limits.

Verdict: Beancount.io provides unmatched flexibility for developers and technical users. Traditional tools are better suited for standard, plug-and-play workflows with popular business applications.

3. Collaboration and Transparency​

How you work with others and audit your records differs significantly.

Beancount.io Collaboration on Beancount.io is managed through Git. This makes every change to your financial ledger completely transparent and auditable. You can see who changed what, when, and why—just like a code review workflow. This is ideal for distributed teams that already embrace tools like GitHub or GitLab. Furthermore, there are no hidden calculations; every number in a report can be traced back to the exact line-item entry in your ledger file, ensuring complete auditability.

Traditional Software Collaboration is handled through built-in user roles and permissions. You can invite your accountant, bookkeeper, or business partners to access the books directly through the web interface. This is highly effective for businesses that follow a traditional model of financial oversight. The downside is that some internal operations, like tax calculations or automated balance adjustments, can be opaque "black boxes," making it difficult to independently verify the logic.

Verdict: Beancount.io is perfect for teams that value granular auditability and code-style collaboration. Traditional systems are more accountant-friendly for real-time, shared GUI access.

4. Cost and Ownership​

The financial models and the concept of data ownership are worlds apart.

Beancount.io The core Beancount software is open-source and free. You only pay for the value-added services of Beancount.io, which include hosting, intelligent automation, and premium features. There are no per-seat licensing fees, so you can scale your team without incurring extra costs. Most importantly, there is zero vendor lock-in. Your data is a collection of text files that you can move, edit, or store anywhere, anytime.

Traditional Software These services operate on a subscription model, typically billed monthly or yearly. Pricing is often tiered based on features, and you may face per-user or per-company fees that scale with your organization. This creates a dependency; if you stop paying, you risk losing access to your data and the software's functionality. This vendor lock-in is a significant long-term risk.

Verdict: Beancount.io is significantly more cost-effective in the long run, especially for technical teams that value data sovereignty. Traditional software offers predictable subscription costs but creates long-term dependency.

5. Learning Curve and Adoption​

How quickly can you get up and running?

Beancount.io The learning curve is undeniably steeper. Adopting this system requires comfort with text-based editing, understanding basic syntax, and familiarity with tools like Git. However, the initial investment pays off. Once mastered, Beancount enables incredibly fast, repeatable workflows and provides a much deeper, foundational understanding of your financial picture.

Traditional Software These platforms are designed for non-technical business owners and offer minimal onboarding friction. You can be up and running, sending invoices and categorizing expenses, within minutes. That said, learning the more advanced features, such as custom report building or setting up multi-entity accounting, still requires a significant time investment.

Verdict: Beancount.io is the right choice if you're willing to invest time in learning a powerful system. Traditional software is faster to start with for non-technical users who need immediate results.

Side-by-Side Comparison

When to Choose Each

The decision ultimately comes down to your team's skills, priorities, and workflow.

Choose Beancount.io if you:

• Are a developer, data analyst, or technically-inclined power user.
• Value absolute transparency, control, and long-term data portability above all else.
• Want to fully automate your accounting and integrate it deeply into your custom workflows.
• Are comfortable treating your financial records with the same rigor as source code.

Choose Traditional Accounting Software if you:

• Want a quick-start, visual interface without any technical setup.
• Need to provide immediate, accountant-friendly access with minimal training.
• Prefer a managed, hosted solution where the vendor handles all updates and compliance.
• Your integration needs are met by popular, off-the-shelf apps.

Final Thoughts

Beancount.io isn’t trying to be a better QuickBooks—it’s a fundamentally different way of thinking. It represents accounting as code. For technical professionals, this shift offers the same leap forward that version control with Git brought to software development: complete transparency, perfect reproducibility, and ultimate control.

At the same time, traditional accounting software continues to win on out-of-the-box ease-of-use and ready-made integrations for non-technical teams. The right choice isn't about which is "better" overall, but which is the perfect fit for your workflow, your priorities, and the degree of control you demand over your financial data.

What it is, when it pays off, and how to model it cleanly in your ledger (with examples).

⚠️ This guide is U.S.-specific and for education only. Talk to a tax pro for your situation.

TL;DR​

• An S-corp is a tax status you choose with the IRS (via Form 2553) so that business profits pass through to the owners' personal tax returns. A key requirement is that you must pay owner-operators a reasonable W-2 salary before taking any profit as dividends or distributions.
• Deadlines matter: For an existing business, you must file no later than the 15th day of the 3rd month of the tax year you want the S-corp status to begin. For a calendar-year 2025 election, March 15, 2025, falls on a Saturday, so the practical deadline is the next business day, Monday, March 17, 2025.
• Why do this? The main attraction is potential self-employment tax savings. While your W-2 salary is subject to FICA taxes, distributions are not. However, this benefit comes with added costs for payroll, compliance, and, in some states, extra entity-level taxes.
• In Beancount, it's critical to separate wages from distributions. You'll need to track payroll liabilities, handle the special accounting for health insurance for shareholders owning more than 2% of the company, and record distributions explicitly through equity accounts.

What is an S-corp election?​

At its core, an S-corp election is a request you make to the IRS to change how your business is taxed. By filing Form 2553, you ask the IRS to tax your corporation or LLC under Subchapter S of the Internal Revenue Code. This makes your business a "pass-through" entity, meaning its income, losses, deductions, and credits are passed directly to the shareholders' personal tax returns. It’s purely a tax classification, not a different type of legal business entity.

Key effects for an owner-operator​

Once the election is active, your role fundamentally splits in two: you are now both a shareholder and an employee of your company.

This distinction is crucial. The compensation you receive for your labor must be paid as W-2 wages, which are subject to standard payroll taxes (Social Security and Medicare). Any remaining profit can then be paid out as distributions, which are generally not subject to self-employment taxes. The IRS insists that you pay yourself a reasonable salary for your work before you take any distributions.

Should you elect S-corp status?​

The S-corp election is often worth evaluating once your business generates steady and meaningful profit. A common rule of thumb is to consider it when your ongoing business profit can comfortably support a market-rate salary for your role, with enough left over to make distributions worthwhile after covering all the new administrative costs.

The exact break-even point is unique to your situation and depends on several factors:

• Your "Reasonable Salary": What would a business pay for someone with your skills and responsibilities in your industry? This figure is the baseline for your W-2 wages and is subject to IRS scrutiny.
• State Taxes and Fees: Some states have their own rules. California, for example, imposes a 1.5% tax on an S-corp's net income, plus a minimum annual franchise tax of $800.
• Added Costs: You'll need a payroll service, and you'll be paying for unemployment insurance. Your bookkeeping and tax preparation fees will also likely increase due to the added complexity.
• QBI Deduction (Section 199A): The S-corp election can impact your Qualified Business Income deduction. The W-2 wages you pay yourself can either help you qualify for the full deduction or, at higher income levels, become a limiting factor.

Eligibility & Timing​

Not every business can become an S-corp. Here are the high-level requirements:

• It must be a domestic corporation or an eligible LLC.
• It can have no more than 100 shareholders.
• It can only have one class of stock.
• Shareholders must be individuals, certain trusts, or estates (i.e., no partnerships, corporations, or non-resident alien shareholders).

When to file Form 2553​

Timing is critical, and the rules differ slightly for new versus existing businesses.

• For a new business: You must file within 2 months and 15 days after the first day of your first tax year. For example, if your business's tax year begins on January 7, your deadline is March 21.
• For an existing C-corp (or an LLC taxed as a C-corp): You can file at any time during the preceding tax year or by the 15th day of the 3rd month of the year you want the election to take effect. If this date falls on a weekend or holiday, the deadline shifts to the next business day, a provision granted under IRC Section 7503.

What if you missed the deadline? Don't panic. The IRS provides a path for late-election relief under Revenue Procedure 2013-30. You can often file for this relief within 3 years and 75 days of the intended effective date, provided you have a reasonable cause for the late filing.

Reasonable Salary: The Part That Trips People Up​

This is the most scrutinized aspect of the S-corp structure. The IRS is very clear: shareholder-employees must be paid reasonable compensation for the services they provide before any profits are taken as distributions.

What does "reasonable" mean? There's no single dollar amount. The IRS and courts look at a variety of factors to determine if your salary is appropriate, including your duties and responsibilities, the time you spend working, your level of experience, and what comparable businesses would pay for similar services. Expect the IRS to take a close look if you pay yourself a very low W-2 salary while taking large distributions. This is often seen as a red flag for attempting to evade payroll taxes.

Health Insurance & Fringe Benefits for >2% Shareholders​

There's a special rule for how S-corps handle health insurance for shareholders who own more than 2% of the company. If the S-corp pays or reimburses these health insurance premiums, the cost is deductible by the S-corp.

However, the value of those premiums must also be included in the shareholder-employee's W-2 wages. While this amount is subject to federal income tax withholding, it is exempt from Social Security and Medicare (FICA) taxes as long as it's handled correctly. You must coordinate with your payroll provider to ensure these amounts are reported properly on your W-2.

State-Level Gotchas (Examples)​

Federal S-corp status doesn't always translate directly at the state level. Always check your state's specific rules.

• California: S-corps are subject to a 1.5% tax on their California-source net income. Additionally, most corporations must pay an $800 minimum franchise tax each year (though some exceptions apply for the first year).
• New York: Making a federal S-corp election is not enough. You must also file a separate state-level election, Form CT-6, to be treated as a New York S-corporation. Failure to do so means you'll be taxed as a standard C-corp at the state level.

How to Model an S-corp Cleanly in Beancount​

Plain text accounting is perfect for managing the added complexity of an S-corp. Here’s how to structure your ledger.

Suggested Chart of Accounts (Starter)​

This basic structure separates your payroll expenses from distributions and creates liability accounts to track taxes you owe.

; Core bank & income
1970-01-01 open Assets:Bank:Checking              USD
1970-01-01 open Income:Sales                      USD
1970-01-01 open Income:Other                      USD

; Payroll expenses & liabilities
1970-01-01 open Expenses:Payroll:Wages            USD
1970-01-01 open Expenses:Payroll:EmployerTaxes    USD
1970-01-01 open Expenses:Benefits:HealthInsurance USD
1970-01-01 open Liabilities:Payroll:Federal:FIT    USD
1970-01-01 open Liabilities:Payroll:FICA          USD
1970-01-01 open Liabilities:Payroll:Medicare      USD
1970-01-01 open Liabilities:Payroll:State:Withholding USD

; Equity
1970-01-01 open Equity:ContributedCapital         USD
1970-01-01 open Equity:Distributions              USD
1970-01-01 open Equity:RetainedEarnings           USD

Typical Payroll Run (Simplified)​

Your payroll provider (e.g., Gusto, ADP) will debit your bank account for your net pay and the total tax liability. Your Beancount transaction should break this down into the gross wages, employer taxes, and the corresponding liabilities.

; This transaction records a $100k annual salary, paid monthly.
2025-01-31 * "Gusto" "Jan payroll — shareholder-employee"
  Expenses:Payroll:Wages                   8,333.33 USD ; Gross wages
  Expenses:Payroll:EmployerTaxes             637.50 USD ; Employer-side FICA/Medicare
  Liabilities:Payroll:Federal:FIT         -1,200.00 USD ; Employee withholding
  Liabilities:Payroll:FICA                  -516.67 USD ; Employee withholding
  Liabilities:Payroll:Medicare              -120.83 USD ; Employee withholding
  Assets:Bank:Checking                    -7,133.33 USD ; Net pay debited from bank

When your payroll provider remits those taxes to the government on your behalf, you'll record another transaction to clear out the liabilities.

; This represents the tax payment made by your payroll provider.
2025-02-15 * "EFTPS" "Federal payroll tax deposit"
  Liabilities:Payroll:Federal:FIT          1,200.00 USD
  Liabilities:Payroll:FICA                   516.67 USD
  Liabilities:Payroll:Medicare               120.83 USD
  Assets:Bank:Checking                    -1,837.50 USD ; This amount matches the tax portion of the Gusto debit.

Health Insurance for a >2% Shareholder​

Record the premium payment as a business expense. You can use metadata to remind yourself that this needs to be reported on the W-2.

2025-02-01 * "BlueCross" "Shareholder health insurance (report on W-2)"
  Expenses:Benefits:HealthInsurance          600.00 USD  ; w2: "true"
  Assets:Bank:Checking                      -600.00 USD

Owner Distributions (Not Wages)​

Distributions are a reduction of equity, not a business expense. Record them separately from payroll.

2025-03-31 * "Owner Distribution" "Q1 distribution"
  Equity:Distributions                    20,000.00 USD
  Assets:Bank:Checking                   -20,000.00 USD

Tracking Shareholder Basis (Optional, but Recommended)​

Your shareholder basis determines whether distributions are tax-free and whether you can deduct business losses on your personal return. While the official calculation is done on your tax return, you can track an estimate in Beancount using a dedicated equity subaccount or metadata. You'll reconcile this to the Schedule K-1 you receive from the S-corp annually.

A Note on the QBI Deduction (Section 199A)​

Owners of pass-through businesses, including S-corps, may be eligible for up to a 20% deduction on their qualified business income (QBI). However, for taxpayers with income above a certain threshold, this deduction can be limited by the amount of W-2 wages the business pays. This creates a complex interplay: paying a reasonable salary is required for an S-corp, and those same wages can impact your QBI deduction—sometimes helping it, sometimes limiting it. This is a key area to model with your tax professional.

What Changes Operationally After You Elect?​

Switching to an S-corp adds a few administrative layers:

• Run Payroll: You must formally run payroll, complete with tax withholdings, employer tax payments, quarterly filings, and year-end W-2s.
• File Form 1120-S: This is the annual S-corporation tax return. You'll also issue a Schedule K-1 to each shareholder detailing their share of the company's financial results.
• Handle Shareholder Health Insurance Correctly: Ensure premiums for >2% owners are included in their W-2 wages.
• Mind State Rules: Stay on top of any required state-level S-corp elections or entity taxes (like in CA and NY).

Common Pitfalls to Avoid​

• Late or Invalid Election: Double-check deadlines and ensure all required shareholders sign Form 2553. If you miss it, investigate relief under Rev. Proc. 2013-30.
• Unreasonable Salary: Don't be tempted to pay yourself an artificially low salary. Document why your compensation is reasonable based on your role and market data.
• Mixing Wages and Distributions: Keep these transactions clean and separate in your books. Distributions are not payroll.
• Ignoring State Requirements: Forgetting a state election or failing to pay an entity-level tax can lead to penalties and compliance headaches.

Quick Checklist​

• Confirm you are eligible and that the potential tax savings outweigh the new costs.
• Calendar the Form 2553 filing deadline (and remember the weekend/holiday rule).
• Set up a payroll service and determine a well-documented, reasonable salary.
• Plan to take distributions only after salary and business expenses are paid.
• Investigate and comply with your state's specific S-corp filing requirements and taxes.
• Update your Beancount ledger with the necessary accounts for payroll, liabilities, and shareholder equity.

Beancount S‑Corp Starter (neutral template)

;
; Beancount S‑Corp Starter (neutral template)
; Generated: 2025-08-09
; ---
; How to use this:
; 1) Search for "TODO" and fill in your state(s), payroll provider, EIN, and bank names.
; 2) Keep wages and owner distributions separate.
; 3) Coordinate with your payroll provider to report >2% shareholder health insurance on the W‑2 (Box 1).
; 4) Delete or adapt the CA/NY examples if you’re in a different state.
;
; Notes:
; - This is a bookkeeping template, not tax advice.
; - Operating currency assumed USD. Change as needed.
;

option "title" "S‑Corp Ledger"
option "operating_currency" "USD"
commodity USD

; === Accounts (open as of 2025-01-01; adjust dates as needed) ==================
2025-01-01 open Assets:Bank:Checking                    USD  ; TODO: Rename to your bank (e.g., Assets:Bank:Chase:Operating)
2025-01-01 open Assets:Bank:Savings                     USD
2025-01-01 open Assets:AccountsReceivable               USD
2025-01-01 open Assets:PrepaidExpenses                  USD

2025-01-01 open Liabilities:CreditCard:Corporate        USD
2025-01-01 open Liabilities:Payroll:Federal:FIT         USD
2025-01-01 open Liabilities:Payroll:Federal:FICA        USD
2025-01-01 open Liabilities:Payroll:Federal:Medicare    USD
2025-01-01 open Liabilities:Payroll:Federal:FUTA        USD
2025-01-01 open Liabilities:Payroll:State:Withholding   USD   ; TODO: Rename state (e.g., CA, NY)
2025-01-01 open Liabilities:Payroll:State:Unemployment  USD
2025-01-01 open Liabilities:Payroll:Local               USD

2025-01-01 open Equity:ContributedCapital               USD
2025-01-01 open Equity:Distributions                    USD
2025-01-01 open Equity:RetainedEarnings                 USD
2025-01-01 open Equity:OpeningBalances                  USD

2025-01-01 open Income:Sales                            USD
2025-01-01 open Income:Other                            USD

2025-01-01 open Expenses:COGS                            USD
2025-01-01 open Expenses:Payroll:Wages                   USD
2025-01-01 open Expenses:Payroll:EmployerTaxes:FICA      USD
2025-01-01 open Expenses:Payroll:EmployerTaxes:Medicare  USD
2025-01-01 open Expenses:Payroll:EmployerTaxes:FUTA      USD
2025-01-01 open Expenses:Payroll:EmployerTaxes:State     USD
2025-01-01 open Expenses:Benefits:HealthInsurance        USD
2025-01-01 open Expenses:Benefits:HSA                    USD
2025-01-01 open Expenses:Benefits:Retirement:Match       USD
2025-01-01 open Expenses:Taxes:State:S‑Corp              USD  ; e.g., CA 1.5% entity‑level tax
2025-01-01 open Expenses:Taxes:State:Franchise           USD  ; e.g., CA $800 minimum franchise tax
2025-01-01 open Expenses:Professional:Payroll            USD
2025-01-01 open Expenses:Professional:Accounting         USD
2025-01-01 open Expenses:Professional:Legal              USD
2025-01-01 open Expenses:BankFees                        USD
2025-01-01 open Expenses:Software                        USD
2025-01-01 open Expenses:Office                          USD
2025-01-01 open Expenses:Meals                           USD
2025-01-01 open Expenses:Travel                          USD
2025-01-01 open Expenses:Insurance:GeneralLiability      USD

; === Example: Owner capitalization =================================================
2025-01-02 * "Owner" "Initial capital contribution"
  Assets:Bank:Checking                        25,000.00 USD
  Equity:ContributedCapital                  -25,000.00 USD

; === Example: Customer payment =====================================================
2025-01-15 * "Stripe" "January subscription receipts"
  Assets:Bank:Checking                        12,000.00 USD
  Income:Sales                               -12,000.00 USD

; === Example: Monthly payroll (single shareholder‑employee) ========================
; Numbers chosen to balance perfectly. Adapt FIT/State numbers to your reality.
; Gross wages: 8,333.33 | Employee FIT: 1,200.00 | State Withholding: 300.00
; Employee FICA (6.2%): 516.67 | Employee Medicare (1.45%): 120.83
; Employer FICA: 516.67 | Employer Medicare: 120.83
; Net pay: 6,195.83
2025-01-31 * "Gusto" "Jan payroll — shareholder‑employee"
  Expenses:Payroll:Wages                         8,333.33 USD
  Expenses:Payroll:EmployerTaxes:FICA              516.67 USD
  Expenses:Payroll:EmployerTaxes:Medicare          120.83 USD
  Liabilities:Payroll:Federal:FIT               -1,200.00 USD
  Liabilities:Payroll:Federal:FICA              -1,033.34 USD  ; employee + employer
  Liabilities:Payroll:Federal:Medicare            -241.66 USD  ; employee + employer
  Liabilities:Payroll:State:Withholding           -300.00 USD
  Assets:Bank:Checking                          -6,195.83 USD

; === Example: Payroll tax deposits (EFTPS & State) =================================
2025-02-15 * "EFTPS" "Federal payroll deposit (FIT, FICA, Medicare)"
  Liabilities:Payroll:Federal:FIT                1,200.00 USD
  Liabilities:Payroll:Federal:FICA               1,033.34 USD
  Liabilities:Payroll:Federal:Medicare             241.66 USD
  Assets:Bank:Checking                          -2,475.00 USD

2025-02-16 * "STATE DOR" "State payroll withholding"
  Liabilities:Payroll:State:Withholding            300.00 USD
  Assets:Bank:Checking                            -300.00 USD

; === Example: Health insurance for >2% shareholder =================================
; Coordinate with payroll so the annual premium total is included in W‑2 Box 1.
; The premium itself is deductible here; do NOT withhold SS/Medicare on it when handled properly.
2025-02-01 * "BlueCross" "Shareholder health insurance (W‑2 inclusion handled by payroll)"
  Expenses:Benefits:HealthInsurance                600.00 USD  ; w2: "true"
  Assets:Bank:Checking                            -600.00 USD

; === Example: Owner distribution (not wages) =======================================
2025-03-31 * "Owner Distribution" "Q1 distribution"
  Equity:Distributions                         20,000.00 USD
  Assets:Bank:Checking                        -20,000.00 USD

; === State examples (delete/edit if not applicable) =================================
; California minimum franchise tax (not always first year; check rules)
2025-04-15 * "California FTB" "Annual franchise tax"
  Expenses:Taxes:State:Franchise                   800.00 USD
  Assets:Bank:Checking                            -800.00 USD

; California S‑Corp 1.5% entity‑level tax (example estimate payment)
2025-06-15 * "California FTB" "S‑Corp tax estimate"
  Expenses:Taxes:State:S‑Corp                    1,500.00 USD
  Assets:Bank:Checking                          -1,500.00 USD

; New York separate S election (CT‑6) has no direct ledger impact; placeholder note.
2025-01-05 note Equity:RetainedEarnings "NY S‑election (CT‑6) filed — bookkeeping note only (no entry)"

; === Basis tracking (optional — off‑book memo) =====================================
2025-12-31 note Equity:RetainedEarnings "Basis rollforward: +Capital 25,000 +Income 60,000 −Distributions 20,000 = End basis 65,000 (reconcile to K‑1)"

; === Import hints (CSV from Gusto/ADP) =============================================
; - For Gusto payroll register CSVs, map columns:
;   Gross Pay -> Expenses:Payroll:Wages
;   Employee FIT/FICA/Medicare -> Liabilities:Payroll:Federal:FIT/FICA/Medicare (negative)
;   State Withholding -> Liabilities:Payroll:State:Withholding (negative)
;   Employer FICA/Medicare/FUTA/SUTA -> Expenses:Payroll:EmployerTaxes:* (positive) AND
;       if your CSV lists employer taxes as amounts owed, mirror them as Liabilities:* (negative),
;       then clear with your EFTPS/state payments.
;   Net Pay -> Assets:Bank:Checking (negative, matches pay date)
; - Health insurance paid by company:
;   Vendor payment -> Expenses:Benefits:HealthInsurance (positive) / Bank (negative);
;   ensure payroll includes the annual premium in W‑2 Box 1 for >2% shareholder.
;
; Tips:
; - Keep distributions out of payroll accounts.
; - Use tags like #payroll #distribution to filter in Fava.
; - Consider separate bank subaccounts for tax set‑asides (federal/state).

Choosing a business structure is one of the first real “finance” decisions you’ll make. For most small teams and solo founders who want liability protection and pass-through taxation, the short list is usually an LLC or an S corporation.

This guide explains how they differ—legally, operationally, and on your tax return—and shows how to keep clean, audit-proof records for either structure in Beancount.io (plain-text, double-entry accounting that scales from freelancer to S corp).

At a Glance​

How They Actually Differ​

While both LLCs and S corps offer a crucial liability shield, their legal and financial mechanics are fundamentally different. Here’s a deeper look at what sets them apart.

Formation and Formalities​

A Limited Liability Company (LLC) is a legal entity created by state law. The process involves filing "articles of organization" with your state and adopting an "operating agreement," which is a flexible internal document that outlines how the business will be run and how profits will be split.

An S corporation, on the other hand, is not a legal entity itself but a tax election made with the IRS by filing Form 2553. This election can be applied to either a standard C corporation or an LLC. Once you elect S corp status, you must adhere to stricter corporate formalities, including drafting bylaws, appointing a board of directors and officers, holding annual meetings, and keeping detailed records of those meetings (known as "minutes").

Ownership & Investors​

Ownership flexibility is a hallmark of the LLC. You can have an unlimited number of owners (called "members"), including individuals, other corporations, and foreign citizens. The operating agreement allows for custom profit splits ("waterfalls") and different classes of membership, which is ideal for complex partnerships.

The S corp is far more restrictive. It can have no more than 100 owners (called "shareholders"), all of whom must be U.S. citizens or residents. Other entities (like corporations or partnerships) cannot be shareholders. Furthermore, S corps can only have one class of stock, meaning all shareholders have identical economic rights (profits and distributions must be allocated proportionally to ownership). This simplicity can make the cap table cleaner but severely limits who can invest.

Taxes & Filings​

By default, an LLC is a pass-through entity.

• A single-member LLC is a "disregarded entity," meaning its income and expenses are reported on a Schedule C filed with the owner’s personal Form 1040.
• A multi-member LLC files a partnership tax return, Form 1065, and issues a Schedule K-1 to each member detailing their share of the profit or loss.

An S corp is also a pass-through entity, but it files its own business tax return, Form 1120-S, and also issues K-1s to its shareholders. The key difference is that any owner who works for the company must be treated as an employee and paid a reasonable salary through a formal payroll system.

How Owners Get Paid​

This is one of the most significant distinctions. LLC members are not employees. They get paid by taking distributions (or "draws") of the company's profits. Members are responsible for paying their own income and self-employment taxes (Social Security and Medicare) on their entire share of the net profits, regardless of how much cash they actually took out.

S corp owner-employees face a two-part system.

1. Reasonable Salary: They must be paid a reasonable wage for the work they perform, which is subject to standard payroll taxes (FICA). The company pays the employer portion, and the employee pays their portion.
2. Distributions: Any remaining profits can be paid out as distributions, which are not subject to self-employment or FICA taxes. This potential tax saving is the primary reason businesses elect S corp status. The IRS requires the salary to be "reasonable," so you can't pay yourself $1 and take the rest in distributions; you must document how you determined the salary amount.

Transferability & Lifespan​

S corp stock functions like typical corporate shares. It is generally freely transferable (unless restricted by a shareholder agreement), and the corporation has a perpetual existence, meaning it continues even if a shareholder leaves or passes away.

Transferring ownership in an LLC is often more complex. The operating agreement dictates the rules, and it typically requires the consent of the other members to sell or transfer ownership units. This protects members from being forced into business with strangers but can make exiting the business more cumbersome.

Should You Elect S Corp Status for Your LLC?​

A very common path for successful small businesses is to start as an LLC and elect S corp taxation later. This "LLC now, S corp when profitable" strategy allows you to enjoy the simplicity of an LLC in the early stages and switch for tax optimization once your income grows.

Founders typically make the switch when:

• Profits are steady and significant. The amount paid in self-employment tax as an LLC member becomes greater than the FICA taxes on a reasonable salary plus the compliance costs of an S corp.
• They desire more structure. The formal requirements of an S corp can enforce better financial discipline and send a more "serious" signal to lenders or future investors.

Electing S corp status for your LLC brings concrete changes:

• You must set up and run payroll for all owner-employees.
• You must adhere to corporate record-keeping, including holding meetings and documenting them with minutes.
• Your annual tax preparation becomes more complex, requiring Form 1120-S and K-1s.

When is it better to remain an LLC?

• You need flexible ownership structures, like special profit allocations or having a corporation or foreign partner as a member.
• Your profit is volatile or you are still in the early stages. The overhead and cost of running payroll might not be worth it yet.
• You plan to issue complex equity, like token-based compensation or preferred units, that don't fit the S corp's "one class of stock" rule.

Practical Rule of Thumb: Before you switch, model your next 12 months of expected profit. Calculate your total tax burden (income + self-employment tax) as an LLC. Then, calculate your total tax burden as an S corp (income tax + FICA tax on a reasonable salary). If the savings from the S corp structure are clear, recurring, and outweigh the added compliance costs, the election is worth a serious look. Be sure to document your analysis for determining a "reasonable salary."

How to Keep Either Structure Clean in Beancount.io​

No matter which entity you choose, chaotic books can undermine your liability protection and create tax-time nightmares. Beancount.io gives you a plain-text, double-entry ledger with automated imports and tax-ready reports, so your legal structure doesn’t turn into bookkeeping sprawl.

Chart of Accounts Suggestions​

A clean chart of accounts is the foundation. Here are our recommendations:

• For an LLC:
  • Equity:Member-Capital (for initial and subsequent contributions)
  • Equity:Member-Distributions (for owner draws)
  • Standard Income and Expense accounts.
• For an S corp:
  • Equity:Common-Stock (for capital contributions)
  • Equity:Retained-Earnings (where profits accumulate)
  • Expenses:Payroll:Wages
  • Expenses:Payroll:EmployerTaxes
  • Equity:Shareholder-Distributions (for payments out of profit)

Example Entries​

Here’s how common owner payments look in a Beancount.io ledger.

LLC member distribution: This transaction records a $5,000 payment to a member, reducing cash and tracking the draw in a dedicated equity account.

2025-03-15 * "Member distribution"
  Assets:Bank:Checking             -5,000 USD
  Equity:Member-Distributions       5,000 USD

S corp owner salary (from a payroll run): This entry captures the gross wage, the employer's share of payroll taxes, and the total cash leaving the bank. Withholding liabilities would also be tracked here.

2025-03-31 * "Owner payroll"
  Expenses:Payroll:Wages            8,000 USD
  Expenses:Payroll:EmployerTaxes      612 USD
  Assets:Bank:Checking             -8,612 USD
  Liabilities:Payroll:Withholding     0 USD  ; Net pay + withholdings

S corp shareholder distribution: This is a simple transfer from cash to the shareholder distribution equity account, separate from payroll.

2025-04-10 * "Shareholder distribution"
  Assets:Bank:Checking            -10,000 USD
  Equity:Shareholder-Distributions  10,000 USD

Close the Loop at Tax Time​

With a clean Beancount.io ledger, tax season is streamlined:

• Generate your Profit & Loss and Balance Sheet statements directly from your transactions.
• Export the data your accountant needs for your specific tax form (Schedule C, 1065, or 1120-S).
• Keep your reasonable salary memos, meeting minutes, and other compliance documents alongside your transactions for a complete, audit-ready financial record.

When Each Choice Shines​

Here's the decision in a nutshell.

Choose (or remain) an LLC if you want:

• Maximum flexibility in ownership, profit splits, or bringing in entity/foreign members.
• Minimal corporate formalities and no mandatory owner payroll.
• Simpler compliance while you are finding product-market fit or have inconsistent profits.

Choose (or elect) an S corp if you want:

• Potential savings on self-employment (FICA) taxes once your profits can justify a formal payroll.
• A clean, traditional corporate structure with straightforward stock transferability.
• A governance model that investors and lenders often prefer for established operating companies.

Bottom Line​

Both LLCs and S corps protect your personal assets and allow business profits to pass through to the owners for tax purposes. The best fit depends entirely on your ownership structure, your expected profitability, and your appetite for formal governance and payroll.

Whichever you choose, disciplined bookkeeping matters far more than the entity's label. Keep your financial records precise, searchable, and reproducible with Beancount.io.

Build Tax-Ready, Investor-Ready Books with Beancount.io​

• Plain-text, version-controlled double-entry accounting.
• Clean charts of accounts designed for LLCs and S corps.
• Automated bank, credit card, and processor imports and reconciliations.
• Tax-ready exports and seamless accountant collaboration.
• A system that scales from a solo founder to a multi-entity enterprise.

Start a streamlined ledger for your entity today with Beancount.io.

This guide is for informational purposes and is not legal or tax advice. Consult your attorney or tax advisor for guidance specific to your situation.

If you run an S corporation, shareholder basis is the quiet number that decides whether your losses are deductible and whether distributions are tax-free. It changes every year, and it’s your responsibility (as a shareholder) to track it. Here’s the plain-English version—plus how to model basis cleanly in Beancount.io.

What “Basis” Means (Fast)​

Think of your stock basis as your personal investment scorecard in the S corporation. It starts with your initial contribution—what you paid for your shares or the value of property you put into the company. From there, it's a dynamic figure.

Your basis increases when the company makes money (your share of its income, even tax-exempt income) or when you contribute more capital. It decreases when you take tax-free distributions, or when the company has losses, deductions, or nondeductible expenses.

Crucially, your stock basis can never drop below zero. If the company’s losses are greater than your basis, the excess losses become suspended. You can't deduct them now, but you can carry them forward to use in a future year when you have enough basis. You'll use Form 7203, filed with your personal Form 1040, to report your basis calculation and track any suspended losses.

If you've also made a direct loan to your S corp, you might have debt basis, which provides a second layer to absorb losses after your stock basis is wiped out.

S Corp vs. C Corp Basis (TL;DR)​

The concept of basis is completely different between S and C corporations.

• S corp basis is fluid and must be adjusted annually. It directly reflects the company's performance because of its pass-through nature. Profits and losses flow through to you and directly impact your basis.
• C corp stock basis is generally static. It’s simply what you paid for the stock. It only changes due to specific corporate actions like stock splits or a formal return of capital, not because the company had a profitable or unprofitable year.

How to Compute S Corp Basis (The Correct Order)​

Calculating your basis isn't just about adding and subtracting; it’s about doing it in the right sequence. The IRS mandates a specific order of operations. Each year, you’ll take your Schedule K-1 (from the S corp's Form 1120-S) and adjust your basis from the beginning of the year as follows:

1. Increase for all income items, including both taxable income and tax-exempt income (like municipal bond interest).
2. Decrease for distributions you received during the year (but not below zero).
3. Decrease for nondeductible expenses (like certain penalties or entertainment expenses).
4. Decrease for losses and deductions (like ordinary business loss or charitable contributions).

If the total losses and deductions in Step 4 exceed your remaining basis, you must prorate them. The excess is suspended and carried forward until you restore your basis through future income or capital contributions.

Important Notes:

• Personally guaranteeing a company loan does not create basis. You only get basis when you actually pay on that guarantee out of your own pocket.
• Owner wages (your salary from the S corp) do not affect your basis. This is compensation for your labor and is treated as a business expense for the company and W-2 income for you, completely separate from your role as an owner.

Worked Example (Numbers That Reconcile)​

Let's walk through an example to see the ordering rules in action.

Facts for a single shareholder for the year:

• Initial capital contribution: $18,000
• Ordinary dividends (K-1 Box 5a): $2,000
• Distributions received (K-1 Box 16D): $7,000
• Share of nondeductible expenses (K-1 Box 16C): $3,000
• Share of ordinary business loss (K-1 Box 1): ($9,000)
• Share of charitable contribution (K-1 Box 12A): $6,000
• The shareholder has no debt basis.

Here is the step-by-step calculation:

Step 1 — Increase for income Your starting basis of $18,000 increases by the$2,000 of dividend income. $18,000 +$2,000 = $20,000

Step 2 — Decrease for distributions Next, reduce the basis by the cash distributions you took. $20,000 −$7,000 = $13,000

Step 3 — Decrease for nondeductible expenses Now, subtract the nondeductible expenses. Your basis before applying losses is $10,000.$13,000 − $3,000 = **$10,000**

Step 4 — Apply losses and deductions Your total losses and deductions are $15,000 ($9,000 ordinary loss + $6,000 charitable). Since this exceeds your remaining basis of$10,000, you can only deduct a proportional amount.

• Allowable ordinary loss = ($9,000 ÷$15,000) × $10,000 = **$6,000**
• Allowable charitable contribution = ($6,000 ÷$15,000) × $10,000 = **$4,000**

The remaining amounts are suspended and carried forward to next year: a $3,000 ordinary loss and a$2,000 charitable contribution.

Your ending stock basis for the year is $0, as it can’t go negative. You'll report the allowed loss and deduction on your tax return and track the suspended amounts for future use.

Tracking S Corp Basis in Beancount.io (Plain-Text Pattern)​

Instead of a messy spreadsheet, you can maintain a simple, auditable basis ledger directly in Beancount.io. This can live in your corporate books or a personal mirror file. The key is to use a "memo" equity account to track the running basis calculation.

Suggested Accounts:

• Equity:Shareholder:Paid-In-Capital
• Equity:Shareholder:Distributions
• Equity:Shareholder:Stock-Basis (This is your off-balance-sheet "memo" account that tracks the official running basis for Form 7203.)
• Income:PassThrough:*
• Expenses:Nondeductible
• Expenses:Charitable

Example Entries:

Initial Capital Contribution: This entry records the cash coming into the company and simultaneously sets the initial stock basis in your memo account.

2025-01-10 * "Initial capital"
  Assets:Bank:Operating                    -18,000 USD
  Equity:Shareholder:Paid-In-Capital        18,000 USD
  Equity:Shareholder:Stock-Basis            18,000 USD

K-1 Ordinary Dividends: Record the pass-through income and the corresponding increase to your basis.

2025-12-31 * "K-1 Box 5a ordinary dividends"
  Income:PassThrough:Dividends             -2,000 USD
  Equity:Shareholder:Stock-Basis            2,000 USD

Distribution to Shareholder: This captures the cash leaving the company and the corresponding reduction in your basis.

2025-07-15 * "Shareholder distribution"
  Equity:Shareholder:Distributions          7,000 USD
  Assets:Bank:Operating                    -7,000 USD
  Equity:Shareholder:Stock-Basis           -7,000 USD

Nondeductible Expenses: Log the expense and the basis reduction.

2025-12-31 * "K-1 Box 16C nondeductible"
  Expenses:Nondeductible                    3,000 USD
  Assets:Bank:Operating                    -3,000 USD
  Equity:Shareholder:Stock-Basis           -3,000 USD

Allowable Losses/Deductions: Record only the portion of losses allowed this year, reducing your basis to zero. Use a comment to track suspended items.

2025-12-31 * "K-1 losses allowed this year (Box 1 + Box 12A, limited by basis)"
  Income:PassThrough:Ordinary-Loss          6,000 USD
  Expenses:Charitable                       4,000 USD
  Equity:Shareholder:Stock-Basis          -10,000 USD
  ; Suspended to next year: 3,000 ordinary loss, 2,000 charitable

This pattern keeps a transparent running basis in the Equity:Shareholder:Stock-Basis account that ties exactly to your Form 7203. Auditors love it because every change is a dated, traceable transaction.

Common Pitfalls​

Avoid these frequent mistakes when managing your S corp basis:

• Treating guarantees as basis. A loan guarantee is just a promise. It doesn't become basis until you actually use your personal funds to pay down the corporate debt.
• Taking distributions with insufficient basis. If you take a distribution that exceeds your basis, the excess amount is not tax-free. It's typically taxed as a capital gain.
• Forgetting to include tax-exempt income. Tax-exempt income (like life insurance proceeds or certain interest) still increases your basis, which can create more room to deduct losses.
• Mixing up owner wages and distributions. Your salary is an expense to the business and taxable compensation to you. It does not affect basis. Distributions are returns of capital/profit and directly reduce basis.

Bottom Line​

Your S corp basis is the throttle on your loss deductions and the shield for your tax-free distributions. It is essential to track it methodically, follow the official ordering rules, and attach a complete Form 7203 to your tax return each year. Whether you started as an S corp or are an LLC taxed as one, clean, disciplined books make basis calculations straightforward and defensible.

Keep Basis (and Everything Else) Tidy with Beancount.io​

• Plain-text, double-entry ledgers that are version-controlled and auditable.
• K-1-friendly categories and dedicated memo accounts for basis tracking.
• Automated imports from banks, credit cards, and processors to reduce manual entry.
• Tax-ready reports that your preparer can use directly.

Start a clean, auditable S-corp workflow with Beancount.io today.

This article is for informational purposes only and is not tax or legal advice. Consult your advisor for guidance specific to your situation.

Plain text accounting (PTA) has long been the secret weapon of tech-savvy finance nerds. Using simple text files and tools like Beancount or Ledger, you get unparalleled control, transparency, and ownership over your financial data. But let's be honest—it's always had a reputation for being, well, a pain. The learning curve is steep, the data entry is tedious, and one misplaced comma can send you on a frustrating debugging quest.

But what if you could have the power of PTA without the pain? Enter Large Language Models (LLMs). AI is starting to creep into every corner of the PTA workflow, promising to automate the boring stuff and make this powerful system accessible to everyone. Based on a deep dive into user feedback, let's explore how AI is revolutionizing plain text accounting—and whether it's living up to the hype.

The Old Way: The Manual Grind of PTA​

For years, the PTA experience has been defined by a few common hurdles:

• The Wall of Intimidation: Newcomers often feel overwhelmed. As one user admitted, "I was too intimidated for years... but it seemed useful and would eventually pay off." Between learning double-entry bookkeeping and navigating command-line tools, getting started is tough.
• The "Edit-Compile-Debug" Cycle: Unlike GUI software that screams at you the second you make a mistake, PTA errors often hide until you run a check. This slow feedback loop feels like debugging code, turning a simple data entry task into a chore.
• The Import Nightmare: Getting your data into the system is a major bottleneck. It often involves manually downloading CSV files from multiple banks, cleaning them up, and running custom scripts—a brittle and time-consuming process. One user spent "about 4 hours catching up on importing the past ~8 months" of transactions, even with some automation.

Enter the AI Assistant: How LLMs Are Slashing the Workload​

This is where AI is changing the game, acting as a powerful assistant to handle the most tedious parts of PTA.

Automating the Grunt Work: Categorization and Imports​

This is the low-hanging fruit for AI. Instead of writing complex rules to figure out what "STARBUCKS #12345" is, you can just ask an LLM.

Users are reporting great success feeding transaction descriptions to models like GPT-4 and getting back perfect categorizations, like Expenses:Food:Coffee. Tools like Beanborg are even integrating ChatGPT to intelligently suggest categories when its own rules fail.

Even better, LLMs are becoming on-the-fly data importers. Instead of writing a Python script to parse a bank's messy CSV file, you can now paste the data into a chat window and ask the AI to convert it to Beancount format. It's not always 100% perfect, but it turns hours of coding into a few minutes of prompt engineering.

Making PTA Less Scary: Onboarding and Error Handling​

That initial wall of intimidation? LLMs are helping users climb it. One new user described using GPT-4 as a "hand-holding tutor" to walk them through setting up their first ledger file. The AI explained concepts, generated example entries, and helped them build the confidence to go it alone.

AI is also providing the real-time feedback that PTA has always lacked. Developers are building editor extensions that use LLMs to check your syntax as you type, highlighting imbalances or errors with the familiar red squiggly line. Imagine an AI that not only flags an error but also explains why it's wrong and suggests a fix.

Chatting With Your Finances​

Perhaps the most exciting development is the rise of conversational analysis. Instead of writing a specific command-line query, you can now just ask your ledger questions in plain English.

Users are experimenting with exporting their data and using tools like Claude to ask things like, "How much did I spend on groceries in March compared to April?" The AI can analyze the data, spot trends, and even offer insights. In the business world, companies like Puzzle.io offer Slack bots that let executives query company financials in real-time. This kind of natural language interface is a game-changer for making financial data accessible.

The Catch: Don't Fire Your Brain Just Yet​

While the possibilities are exciting, users are right to be cautious. Two major concerns consistently come up: privacy and trust.

• Privacy is Paramount: Your financial history is incredibly sensitive. As one user put it, "I'm worried that I'm feeding some API with my financial history." Sending your data to a third-party cloud service like OpenAI is a non-starter for many. The solution? A growing number of users are running open-source LLMs locally on their own machines, ensuring their data never leaves their control.

• Trust, but Verify: LLMs can be confidently wrong. They sometimes "hallucinate" account names or make small math errors that unbalance an entry. The community consensus is clear: use AI as an assistant, not an autonomous accountant. Always run your ledger through a final check (bean-check) and keep a human in the loop for final approval.

The Future is Augmented, Not Replaced​

LLM assistance is rapidly transforming plain text accounting from a niche, expert-only system into a powerful tool that's becoming more accessible every day. The AI is fantastic at handling the repetitive, soul-crushing parts of bookkeeping—data entry, categorization, and parsing.

This frees up humans to do what they do best: review, interpret, and make decisions. The future isn't about letting a robot manage your money. It's about a partnership where the AI does the heavy lifting, giving you the clean, accurate data you need to truly understand your financial story.

As one user aptly put it, "Let the robots do the repetitive bookkeeping, so humans can focus on understanding and decision-making." With that balanced approach, the once-painful world of plain text accounting is looking brighter than ever.

You formed an S-corp to keep your business lean and tax-efficient. But while the "pass-through" concept sounds simple, the reality involves payroll taxes, potential entity-level charges, and crucial state-by-state differences.

Here’s how the taxes actually work for an S-corp in 2025—and how to keep a clean, audit-proof record in Beancount.

What Gets Taxed (and Where)​

The core of the S-corp structure is how it handles profit. It's a three-part system: pass-through income, entity-level taxes, and payroll taxes.

• Pass-Through at the Federal Level: An S-corp generally pays no federal income tax on its ordinary business profit. Instead, that profit (along with other tax items like credits and deductions) flows through to the shareholders via a Schedule K-1. Shareholders report this income on their personal tax returns, whether or not they actually took the cash out of the business. Crucially, this K-1 profit is not subject to self-employment tax.
• But... Entity-Level Taxes Can Apply: The "no corporate tax" rule isn't absolute. In specific cases, an S-corp may owe tax directly. The most common triggers are the built-in gains (BIG) tax (for recent C-corp conversions) and the excess net passive income tax.
• Payroll Taxes Are Real: This is the most important rule for shareholder-employees. If you work in your business, you must be paid reasonable compensation as W-2 wages before you take any tax-favored distributions. These wages are subject to FICA (Social Security & Medicare) and income tax withholding, just like any other employee's pay.

Payroll, at a Glance (2025) payroll​

For any shareholder-employee, you'll be running payroll and filing standard payroll tax forms, including quarterly Form 941 (for income tax withholding and FICA) and annual Form 940 (for federal unemployment tax, or FUTA).

The key 2025 rates are:

• Social Security (OASDI): The wage base is $176,100. The tax rate is 6.2% for the employee and 6.2% for the employer on wages up to this cap.
• Medicare: There is no wage cap. The rate is 1.45% for the employee and 1.45% for the employer on all wages.
• Additional Medicare Tax: A 0.9% tax is withheld from an employee's wages that exceed $200,000 in a year. There is no employer match for this portion.

Entity-Level Taxes You Might See​

While less common, you must be aware of taxes the S-corp itself might owe.

• Built-in Gains (BIG) Tax: If you converted your business from a C-corp to an S-corp, you face a 5-year recognition period. If you sell appreciated assets that the company held during its C-corp days within this window, the S-corp itself will owe a corporate-rate tax on those gains. This is calculated on Schedule D of Form 1120-S.
• Excess Net Passive Income Tax: This applies if your S-corp has accumulated earnings & profits (AE&P) from a prior life as a C-corp and its passive income (like rents, royalties, and interest) exceeds 25% of its gross receipts.
• Quarterly Estimates for These Taxes: If you expect the total of BIG tax, passive income tax, and certain other recapture taxes to be $500 or more, the S-corp must make quarterly estimated payments. For 2025, the calendar-year due dates are April 15, June 16, September 15, and December 15.

State & Local Gotchas 🗺️​

Never assume federal rules apply at the state or city level. Tax treatment varies widely.

• California: S-corps must pay an $800 minimum franchise tax each year, plus a 1.5% tax on net income.
• New York City: NYC does not recognize the S-corp election. A federal S-corp is generally subject to the full NYC General Corporation Tax.
• Elective Pass-Through Entity (PTE) Taxes: As a workaround to the federal $10,000 SALT deduction cap, many states now allow S-corps to elect to pay state income tax at the entity level. The rules are complex and shifting—talk to your CPA before making a PTE election.

What the Owners Pay​

As a shareholder, your personal tax picture is directly linked to the S-corp's performance.

• K-1 Income on Your 1040: You will report the income, losses, deductions, and credits passed through to you on your Schedule K-1 on your personal Form 1040.
• Quarterly Estimated Taxes: Since your K-1 income doesn't have taxes withheld, you will likely need to make personal quarterly estimated tax payments to the IRS using Form 1040-ES to avoid underpayment penalties.
• The QBI Deduction (Section 199A): Your pass-through income may qualify for the valuable Qualified Business Income (QBI) deduction, which can be up to 20% of your business income. At higher income levels, this deduction can be limited by the amount of W-2 wages the S-corp pays—making your "reasonable compensation" figure even more important.

Baseline Filing & Forms​

At a minimum, your annual compliance will include:

• Form 1120-S: The S-corporation income tax return.
• Schedule K-1: For each shareholder.
• Payroll Forms: Quarterly 941s, annual 940, and W-2s/W-3s for employees.
• Form 1099-NEC: For payments of $600 or more to most independent contractors.

Beancount: Map It So You Never Wonder “Where Did That Go?”​

A clear chart of accounts is essential for tracking these moving parts.

Starter Accounts​

Assets:Bank:Operating
Assets:PrepaidTax:Federal            ; For S-corp level estimated payments
Expenses:Payroll:Wages
Expenses:Payroll:Employer:SocialSecurity
Expenses:Payroll:Employer:Medicare
Expenses:Payroll:Employer:FUTA
Expenses:Tax:Federal:S-Corp          ; For BIG/passive income tax expense
Liabilities:Payroll:Withholding:{Federal,SocialSecurity,Medicare}
Equity:Distributions

Transaction Examples​

Run Payroll (Company side + withholdings)

2025-02-28 * "Payroll - February"
  Assets:Bank:Operating                        -10350.00 USD
  Expenses:Payroll:Wages                         12500.00 USD
  Expenses:Payroll:Employer:SocialSecurity         775.00 USD
  Expenses:Payroll:Employer:Medicare               181.25 USD
  Liabilities:Payroll:Withholding:Federal        -3000.00 USD
  Liabilities:Payroll:Withholding:SocialSecurity  -775.00 USD
  Liabilities:Payroll:Withholding:Medicare        -181.25 USD

Owner Distribution (Non-wage)

2025-03-10 * "Shareholder distribution"
  Assets:Bank:Operating                         -5000.00 USD
  Equity:Distributions                           5000.00 USD

Corporate-Level Estimated Tax (If applicable)

2025-04-15 * "1120-S entity-level estimate (BIG/passive tax)"
  Assets:Bank:Operating                         -1200.00 USD
  Assets:PrepaidTax:Federal                      1200.00 USD

Marking Key Filing Dates

2026-03-15 note "E-filed 2025 Form 1120-S; furnished K-1s to all shareholders."

Sanity Checks (bean-query)​

Use queries to ensure your records are sound.

Wages vs. Distributions YTD (Reasonable Comp Reality Check)

SELECT account, SUM(position)
WHERE (account ~ "Expenses:Payroll:Wages" OR account ~ "Equity:Distributions")
  AND year = 2025
GROUP BY account;

Did We Record the K-1 Handoff?

SELECT date, narration WHERE narration ~ "K-1";

Practical Tips (So the IRS Doesn’t Call) ✅​

1. Document "Reasonable Compensation." Keep a simple memo with your job duties, time allocation, and links to market salary data. Pay this amount via formal W-2 payroll.
2. Separate Wages and Distributions Cleanly. Never mix them. Your Beancount ledger should make the distinction obvious.
3. Watch State Rules. Be aware of minimum taxes (like in CA) or S-corp non-recognition (like in NYC).
4. Revisit Estimates. If your income changes significantly mid-year, adjust both your personal 1040-ES and any S-corp level estimated payments.

This guide provides general information, not tax advice. Every business situation is different. Always consult with a qualified CPA for guidance specific to your circumstances.

If you run an S-corp and work in it, the IRS expects you to take W-2 wages before you take owner distributions. The key phrase that governs this entire process is “reasonable compensation.” Getting this wrong can lead to costly tax adjustments and penalties.

Here’s what “reasonable” means in practice—and how to track it cleanly and defensibly in your Beancount ledger.

What the IRS Actually Requires​

The rules are straightforward: shareholder-employees must be paid reasonable compensation for their services before receiving non-wage distributions. Paying yourself too little (or nothing at all) while taking large distributions is a major red flag. The IRS can, and often does, reclassify those distributions as wages, hitting you with back payroll taxes and penalties.

This isn't a new or obscure rule. The IRS has emphasized it for years, notably in its Fact Sheet FS-2008-25, which clarifies that corporate officers who perform more than minor services are to be treated as employees for FICA tax purposes. On your annual Form 1120-S, officer pay is reported on Line 7 (“Compensation of Officers”), and the instructions explicitly state that these amounts are considered wages to the extent they are for reasonable compensation.

Courts consistently back this up. In the landmark case Watson v. United States, a CPA paid himself a salary of only $24,000 while taking significant distributions from his profitable firm. The court sided with the IRS, recharacterizing most of those distributions as wages subject to employment taxes.

How to Estimate a Reasonable Salary (Simple, Defensible)​

So, how do you determine a "reasonable" number? Think of it this way: what would you have to pay someone else to do the job you actually do, in your market, with your experience? The IRS views this as a valuation problem, and there are several common-sense ways to arrive at a defensible figure.

Here’s a pragmatic workflow:

1. Start with Market Comps: This is your anchor. Use resources like Glassdoor, the Bureau of Labor Statistics (BLS), or salary ranges from recruiters to find data for comparable roles in your geographic area.
2. Factor in Your Role & Time Split: Most small business owners wear multiple hats. Acknowledge this by weighting your salary based on the time you spend on different functions. For example, you might be 60% software engineer and 40% product manager.
3. Perform an Ability-to-Pay Sanity Check: Your company's financial health matters. A business with losses may not be able to support a top-quartile salary. However, reporting zero wages while you perform substantial services is rarely justifiable.
4. Document Everything: Save your sources, notes, and calculations. This documentation is your first line of defense in an audit. (More on this below.)

Quick Worksheet (Illustrative)​

Let's walk through an example:

• Market Pay: You find that the local median salary for a Senior Engineer is $140,000** and for a Product Manager is **$120,000.
• Your Time Split: You estimate your time is 60% engineering and 40% product management.
• Weighted Base Salary: $(0.60 \\times$140,000) + (0.40 \times $120,000) =$84,000 + $48,000 =$132,000$.
• Final Decision: Based on your company's current margins, you decide on a salary of $125,000 and plan to revisit it annually.

For context, the 2025 payroll tax rates are 6.2% for Social Security on wages up to $176,100 and 1.45% for Medicare on all wages. Both the employee and employer pay these amounts.

Common Pitfalls to Avoid​

Steer clear of these common mistakes that can attract IRS scrutiny:

• Taking Distributions Before Wages: If you provided services to your S-corp during the year, you must run payroll for your reasonable wages before taking any distributions.
• Setting a "Token" Salary: A nominal salary—like $10,000 for a full-time officer of a highly profitable company—is a near-certain trigger for reclassification, as seen in the Watson case.
• Mishandling >2% Shareholder Health Insurance: Premiums paid for health insurance for shareholders who own more than 2% of the company must be included in their W-2 wages. These amounts are subject to income tax but are generally exempt from FICA taxes. Coordinate with your CPA or payroll provider to ensure this is handled correctly.

A Clean Beancount Setup​

Your ledger is the perfect tool for maintaining a clear line between wages and distributions.

Minimal Chart of Accounts​

Assets:Bank:Operating
Expenses:Payroll:Wages
Expenses:Payroll:Employer:SocialSecurity
Expenses:Payroll:Employer:Medicare
Liabilities:Payroll:Withholding:Federal
Liabilities:Payroll:Withholding:SocialSecurity
Liabilities:Payroll:Withholding:Medicare
Equity:Distributions

Example Postings​

This example shows a monthly payroll run for a $150,000 annual salary ($12,500/month), followed by a separate owner distribution. Notice how wages are recorded as a business expense, while distributions are a reduction of equity.

; Run monthly payroll (company side + withholdings)
2025-02-28 * "Payroll - February"
  Assets:Bank:Operating                      -10350.00 USD
  Expenses:Payroll:Wages                      12500.00 USD
  Expenses:Payroll:Employer:SocialSecurity      775.00 USD
  Expenses:Payroll:Employer:Medicare            181.25 USD
  Liabilities:Payroll:Withholding:Federal     -3000.00 USD
  Liabilities:Payroll:Withholding:SocialSecurity  -775.00 USD
  Liabilities:Payroll:Withholding:Medicare    -181.25 USD

; Owner distribution (non-wage)
2025-03-10 * "Shareholder distribution"
  Assets:Bank:Operating                      -5000.00 USD
  Equity:Distributions                        5000.00 USD

Useful Checks with bean-query​

Periodically, you should compare your year-to-date wages against distributions. This query makes it easy:

; Compare wages vs. distributions YTD
SELECT account, SUM(position)
WHERE (account ~ "Expenses:Payroll:Wages" OR account ~ "Equity:Distributions")
  AND year = 2025
GROUP BY account;

Paper Trail (Protect Yourself)​

If the IRS ever asks, you'll want your reasoning documented.

• Create a short compensation memo each year. Detail your roles, time split, links to market data you used, and the final salary you chose.
• Store this memo in your Beancount directory, for example: docs/comp/YYYY/comp-memo.md.
• Keep copies of all official payroll reports and your annual W-2/W-3 filings.
• Record your decision directly in your ledger with a note entry.

2025-01-15 note "Set 2025 officer salary at $125,000 based on market comps + role split. See docs/comp/2025/comp-memo.md"

FAQ (Fast)​

• Can my salary be $0 if my company lost money? 📉 If you performed significant services, the IRS still expects you to be paid a reasonable wage for that work. If cash flow is a serious issue, get professional advice on how to proceed.
• How often should I revisit my salary? 🗓️ At least annually. You should also reassess it anytime your role, responsibilities, or the market changes significantly.
• What if I’m the only person in the company? 🙋 Even if you're a solo operator, you are still an employee of your S-corp. You must run formal payroll if you work in the business.

This guide provides general information and is not a substitute for professional tax advice. Always consult with a qualified CPA to address your specific financial situation.