S-Corp Payroll Checklist: 8 Things Owners Should Review

If you own an S-Corp, our S-Corp payroll checklist covers eight things worth reviewing before your final payroll of the year.

We see this regularly with small business owners. Everything looks fine in QuickBooks, the payroll runs are happening, and the owner has been taking money out of the business throughout the year. Then we start preparing the tax return and discover that something should have been handled through payroll months earlier.

We wrote an article about 5 changes business owners should understand if they own an S-Corp. That article describes more of the why behind this checklist. But having a checklist and a deadline is sometimes more helpful.

The good news is that many of these issues are easier to address before December 31 than after the W-2s have been issued.

Your S-Corp Payroll Checklist: What to Do Next

Before your final payroll, work through this S-Corp payroll checklist with your accountant and payroll provider.

Review reasonable shareholder compensation.
Confirm shareholder health insurance premiums and W-2 treatment.
Check that owner distributions aren’t recorded as expenses.
Review retirement contributions against eligible W-2 compensation.
Identify outstanding accountable-plan reimbursements.
Determine whether a year-end bonus payroll is necessary.
Verify qualified tip and overtime reporting.
Confirm payroll-provider processing deadlines.

#1 – Is Your S Corporation Owner Compensation Reasonable?

One of the primary benefits of an S corporation is that business profits distributed to shareholders generally aren’t subject to Social Security and Medicare taxes. But that doesn’t mean an owner can simply take all the money out of the business as distributions.

The IRS requires shareholder-employees who perform services for the corporation to receive reasonable compensation before taking non-wage distributions. And there is no magic salary amount that works for every S corporation. A reasonable salary depends on several factors, including:

What you actually do for the business
How many hours you work
Your experience and responsibilities
What someone else would be paid to perform similar work
How the business generates its revenue

For example, someone operating a consulting business where virtually all the revenue comes from their personal services has a different compensation situation than someone who owns a retail business with employees handling most of the operations.

What to review: Compare your year-to-date W-2 compensation with the work you performed and the distributions you received. If an adjustment is necessary, determine whether additional payroll should be processed before year-end.

The IRS can reclassify shareholder distributions as wages when reasonable compensation has not been paid.

For more information, see the IRS guidance on S corporation compensation and medical insurance.

#2 – Did You Report S Corporation Shareholder Health Insurance?

This is one of the most frequently missed year-end adjustments we encounter.

If you own more than 2% of an S corporation, the health insurance premiums paid by the business on your behalf generally need special treatment on your W-2. Under the applicable rules, these premiums are generally included in Box 1 of your W-2 but excluded from Social Security and Medicare wages in Boxes 3 and 5.

This treatment is important because it can help establish eligibility for the self-employed health insurance deduction on your personal return, assuming you meet the other requirements.

Here’s where owners get into trouble.

Perhaps you purchase insurance through the marketplace and pay the premiums from your personal checking account. Or perhaps the business pays the insurance company directly, but the payroll provider doesn’t know about it. Either way, the bookkeeping and payroll need to agree.

If you paid $650 per month for qualifying coverage, that’s $7,800 of annual premiums that may need to be reported properly. And if the business hasn’t paid or reimbursed the premiums, that may need to be addressed as well.

What to review: Confirm the total premiums paid during the year, who paid them, whether the corporation reimbursed you, and whether the proper amount has been included in payroll.

Also remember that being eligible for subsidized coverage through another employer’s plan can affect your personal deduction.

#3 – Are Owner Distributions Recorded Correctly?

Here’s a bookkeeping problem we see more often than you might expect. An owner transfers $5,000 from the business checking account into a personal account. Instead of recording it as a shareholder distribution, the transaction gets categorized as an expense.

Sometimes it’s recorded as salary. Sometimes it’s an uncategorized expense. Sometimes it’s buried in another expense account. But a shareholder distribution isn’t an ordinary business expense. It generally reduces shareholder equity and can affect stock basis. It doesn’t automatically reduce taxable business profit.

The same problem can happen when the business pays an owner’s personal credit card, mortgage, or other personal expenses. Those payments need to be reviewed and properly classified. Depending on the circumstances, they may represent distributions, compensation, loan transactions, or another appropriate category.

What to review: Look through shareholder distributions, owner draws, shareholder loans, and unusual expense categories. Make sure personal transactions haven’t been treated as deductible business expenses.

Remember, moving money out of the business isn’t the same as creating a business deduction.

#4 – Are Your Retirement Contributions Based on the Right W-2 Compensation?

If you’re using a SEP IRA, Solo 401(k), or another retirement plan, your W-2 compensation can directly affect how much you can contribute. For an S corporation shareholder-employee, retirement contributions are generally based on eligible compensation from the corporation, not shareholder distributions.

For example, suppose your business has $180,000 in profit, but you’ve paid yourself only $50,000 in W-2 wages. You generally cannot calculate your employer retirement contribution using the full $180,000.

For a SEP IRA, the employer contribution is generally limited to 25% of eligible compensation, subject to annual limits and plan rules. A Solo 401(k) has different rules for employee deferrals and employer contributions. That distinction matters when you’re planning both your salary and retirement savings.

What to review: Confirm your year-to-date eligible W-2 compensation, employee deferrals, employer contributions, and remaining contribution opportunities. Some elections and employee deferrals must be addressed through payroll before year-end, even when certain employer contributions can be funded later.

#5 – Have You Reimbursed Business Expenses Paid Personally?

Many small business owners pay business expenses personally. Perhaps you used your personal credit card for software, purchased supplies, or paid for a business trip. Those expenses shouldn’t simply disappear because they weren’t paid from the business bank account. But they also shouldn’t automatically be treated as additional wages or shareholder distributions.

This is where an accountable plan becomes important.

An accountable plan allows a business to reimburse employees, including eligible shareholder-employees, for legitimate business expenses without treating properly substantiated reimbursements as taxable wages. Generally, the expenses must have a business connection, be adequately documented within a reasonable period, and any excess advances must be returned.

For example, if you paid $1,200 personally for legitimate business travel, the corporation may be able to reimburse you under its accountable plan. That is different from simply transferring $1,200 to yourself without documenting the expenses.

What to review: Identify legitimate business expenses paid personally that haven’t been reimbursed. Provide receipts and business purposes, and make sure reimbursements follow the company’s accountable plan.

For expenses that are partially personal, such as phone or internet service, the business portion needs reasonable support.

#6 – Do You Need a Year-End Bonus Payroll?

Sometimes an S corporation owner reaches December and realizes their salary needs to be adjusted. Perhaps profits were higher than expected. Perhaps compensation was too low relative to the work performed. And in NYC, with the Business Income Tax, managing your taxes is even more complicated.

A year-end bonus payroll may help address the situation. But there are several things to consider.

First, a bonus is wages. It is generally subject to applicable payroll taxes and withholding.

Second, a bonus may affect retirement plan calculations.

Third, the business needs enough cash to cover the net paycheck and payroll tax obligations.

And finally, the bonus must be properly processed and paid in the applicable tax year.

We occasionally see owners try to address these issues with a journal entry after the year has ended. A bookkeeping entry by itself does not establish that wages were actually paid or that the required payroll taxes were handled.

What to review: Determine whether an additional payroll run is appropriate, calculate the full cash requirement, and coordinate with your accountant and payroll provider before the final processing deadline.

#7 Are Qualified Tips and Overtime Being Reported Correctly?

For businesses with employees who receive tips or overtime, the 2026 payroll reporting requirements deserve special attention. Federal legislation enacted in 2025 introduced deductions for certain qualified tips and qualified overtime compensation.

While none of our S-Corp owner clients are eligible over overtime, we have a few that are eligible for tips. We have many hair salon owners who also provide services to their clients and receive tips.

But these deductions do not mean that all tips or overtime wages are tax-free. For example, the qualified overtime deduction generally applies to the overtime premium required under the federal Fair Labor Standards Act.

If an employee normally earns $20 per hour and receives $30 per hour for qualifying overtime, the additional $10 premium is generally the amount relevant to the federal deduction—not the entire $30.

Similarly, qualified tips must meet specific federal requirements. Mandatory service charges are not automatically treated as qualified tips.

Starting with 2026 Forms W-2, employers have additional reporting requirements, including:

Box 12, Code TP, for total cash tips reported to the employer
Box 12, Code TT, for qualified overtime compensation
Box 14b for applicable Treasury tipped occupation codes

These reporting changes make accurate payroll records especially important. And for New York employers, there’s another consideration: New York’s wage and overtime rules may differ from the federal rules used to determine eligibility for these deductions.

What to review: Confirm that your payroll provider is properly tracking tips, qualified overtime premiums, and the required W-2 information.

Don’t assume that simply having an overtime or tips category in your payroll system means the new reporting requirements are being satisfied.

For additional information, see the IRS instructions for Forms W-2 and W-3.

#8 – Know Your Payroll Provider’s Year-End Deadlines

December 31 may be the end of the tax year, but that doesn’t mean December 31 is the last day you can submit payroll changes. Payroll providers have their own processing deadlines. Depending on the provider, there may be separate cutoff dates before December 31 for:

Regular payroll runs
Off-cycle bonus payroll
Shareholder health insurance adjustments
Retirement contribution changes
Employee information corrections
Year-end taxable fringe benefits

What to review: Ask your payroll provider for its final processing deadlines and confirm how it handles shareholder health insurance, bonuses, retirement contributions, and year-end corrections.

If you’re using Gusto, QuickBooks Payroll, ADP, or another provider, don’t assume their cutoff dates or procedures are identical. You don’t necessarily need to make changes in every category. The point is to identify which items apply to your business while there is still time to address them properly.

Use This S-Corp payroll checklist And Don’t Wait Until Tax Preparation to Discover a Payroll Problem

At My Fiscal Office, we work with S-Corp owners throughout the year on payroll, bookkeeping, and tax planning. One thing we’ve learned is that the final payroll of the year is an important checkpoint.

We would much rather identify an issue in November or December than discover it when we’re preparing your tax return in March.

The goal isn’t just getting the W-2s filed correctly. It’s making sure your payroll, accounting, retirement contributions, and personal tax return all tell the same story.

Need Help Reviewing Your S-Corp Payroll Before Year-End?

At My Fiscal Office, we help small business owners understand their numbers, address potential problems, and make informed tax decisions before deadlines arrive.

If you have questions about your SCorp’s payroll, shareholder health insurance, owner compensation, or year-end tax planning, we’re here to help.

Contact My Fiscal Office to discuss your year-end payroll and tax planning.

A little attention before the year closes can save a lot of cleanup later.