S-Corp Election, Explained for Beancount Users
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).
