Small business compliance guide: books, workers and S corporation pay
Seven topics that cause the most trouble for small business owners: how to account for income, what books to keep, who is an employee, year-end accruals, and how S corporation owners must be paid and covered by benefits.
Prepared by Prem Tax and Accounting Corp. Last checked against official sources on October 21, 2026.
The seven topics
Cash, accrual or modified cash
What each method is, who may use cash, and how to change.
Read →Books and records
The books the IRS expects, what to keep and for how long.
Read →Employees vs contractors
The IRS test, the forms for each, penalties, relief and the Illinois test.
Read →Year-end accruals
When an expense owed at December 31 is deductible, and the owner trap.
Read →S corporation owner pay
Reasonable compensation, payroll and distributions.
Read →2% shareholder rules
Who counts, which benefits become taxable and how to report them.
Read →S corporation owner health insurance
The W-2 steps and the deduction on the personal return.
Read →Numbers at a glance
Mistakes we see
- Paying an S corporation owner only distributions and no salary.
- Treating workers as contractors because it is simpler, when the IRS would call them employees.
- Deducting a year-end bonus to an owner in the year it was accrued, when it is deductible only when paid.
- Paying health insurance personally and deducting it without the S corporation paying it and reporting it on the owner's W-2.
- Switching between cash and accrual without asking the IRS.
- Throwing records away too soon.
Related guides: basis of accounting, business records, payroll services and the start-up tax guide.
Common questions
Which accounting method should a small business use?
Many small businesses use the cash method because it is simple. Accrual gives a truer picture of profit and is required for some larger C corporations and partnerships with a C corporation partner. The choice is made on your first tax return, and changing it later usually needs IRS approval. See our accounting methods page.
Do I have to keep books if I use a bookkeeper?
Yes. You are responsible for your records even when someone else keeps them. The IRS asks that your records clearly show your income, deductions and credits and that you can support them.
Are S corporation owners employees?
Officers who perform services for an S corporation are employees, and their pay for those services must be treated as wages, not as distributions. See our page on S corporation owner pay.
Is health insurance for an S corporation owner deductible?
It can be, but only if the S corporation pays or reimburses the premiums and reports them as wages on the owner's Form W-2. The owner then deducts them on the personal return. See our health insurance page.
Can I get advice for my own situation?
Our retainer clients can call us for specific information. If you own a small business, consider becoming a retainer client, so that the answers are specific to your own tax situation.
Official sources
- IRS Publication 538: Accounting periods and methods
- IRS Publication 583: Starting a business and keeping records
- IRS: Independent contractor (self-employed) or employee?
- IRS: S corporation compensation and medical insurance issues
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