As an S Corporation, the below year-end housekeeping items should be considered and are recommended:
- Reporting health insurance premiums paid on behalf of any more than 2% S Corporation shareholder employee is one of the most common errors made by S Corporation owners. To be deductible, these premiums must be treated as compensation, included in shareholder wages and must be reported on Form W-2. These wages are only taxable for Federal Income Tax and are not subject to Social Security and Medicare FICA payroll taxes. We recommend that you check with your payroll processor to make sure that they will be reporting health insurance correctly on your 2022 Form W-2.
- Officer compensation for S Corporations continues to be one of the top IRS audit risks. Officer compensation refers to how much salary your S Corporation pays shareholders. The IRS wants you to pay a reasonable salary, but the definition of “reasonable” can be highly subjective. We recommend that you review your salary and that you do so as soon as possible, as adjustments can only be made before the end of the year.
- A shareholder loan takes place when either a shareholder borrows money from the corporation, or when a corporation borrows money from a shareholder. Please be aware that these loans should have an interest rate equal to or greater than the Applicable Federal Rate (AFR). Such loans should also be documented with a promissory note, and interest should be paid or accrued at least annually.
If you made nonemployee payments to an individual service provider, including certain types of entities, in the amount of $600 or more in 2022, you must issue the provider a Form 1099-NEC for the year. These forms must be provided to the individual by January 31, 2023 and a copy of Form 1099-NEC and Form 1096 are due to the Internal Revenue Service on or before January 31, 2023.