Recording Income Tax Payments: LLC, S Corp and C Corp Books

How do I record income tax paid from the business account?

Record each payment by who owes the tax, not by which account paid it. An owner's personal income tax paid from the business account is a draw or a distribution. A C corporation's own income tax is a business tax, but the federal part of it is still not deductible (26 U.S.C. 275).

A draw or distribution is money an owner takes out; it sits in equity, not in profit. An owner's own state income tax follows the same rule. If a single-member LLC's owner is a corporation or partnership, the LLC is part of that owner and the tax follows that owner's row. Some states also tax the business itself; that is covered in the state tax section below.

The word "LLC" does not decide this. The IRS treats an LLC as a partnership, a corporation or part of its owner's return, depending on its members and elections (IRS). Use the tax classification on the return, not the state entity type.

A case is not simple when:

• The classification changed during the year, for example a second member joined or an S election took effect.
• A payment went to the wrong year or under the wrong taxpayer, so the books, the bank and the IRS account disagree.
• One owner's tax was paid from an account all owners share, or a partnership or S corporation paid one owner's tax and the others received nothing.
• One payment covers tax, penalty and interest.
• The IRS or the state sent a notice that moved or removed a payment.

Gather the payment confirmations, the IRS and state account history, and the entity's tax elections. The last section lists what a preparer needs.

How do I record estimated tax payments for a sole proprietor or single-member LLC?

Where the sole owner is an individual, book every federal and state estimate as an owner's draw in an equity account, not as an expense. A sole proprietor and a single-member LLC with no election are one taxpayer: the owner reports the business on Schedule C and pays the tax personally (IRS).

Why the payments are not on Schedule C, and where they go instead:

• The line 23 instructions say not to deduct federal income taxes, including self-employment tax. One-half of the self-employment tax is deducted on Schedule 1, line 15 instead (Schedule C instructions).
• Estimated federal payments are credited on the owner's Form 1040, in the estimated tax payments line (Form 1040 instructions).
• The owner's state income tax estimate is also personal. The business's own state licenses and regulatory fees are line 23 items (Schedule C instructions).

If a payment is booked as a tax expense and the books feed the return, the return deducts tax that line 23 disallows, and book profit no longer ties to Schedule C.

Use a draw account for the owner and put the tax, the period and the tax year in each payment's memo, such as "federal, second quarter", so the totals tie to the IRS and state accounts. An estimate also pays self-employment tax and any other tax the owner owes, so it will not equal tax on the business profit alone (IRS). For amounts and dates, see quarterly estimated tax payments. For the entry itself, see recording owner's draws.

How do I book a partner's estimated tax paid from a partnership or multi-member LLC account?

Charge it to that partner as a draw, not to the partnership as an expense. A partnership generally does not pay tax on its income; it passes profits and losses to its partners (Publication 541). The Form 1065 instructions say not to deduct federal income taxes or taxes not imposed on the partnership on line 14 (instructions).

A partnership that pays a partner's personal tax settles that partner's own obligation. Publication 541 treats a partnership's assumption of a partner's individual liabilities as a distribution of money to that partner, which also reduces the partner's basis (Publication 541). Publication 541 does not mention tax payments. Paying a partner's own tax bill is generally treated like assuming that partner's liability, so book it in that partner's draw or capital account; the operating agreement and the preparer decide edge cases.

Check three things:

• The operating agreement. It usually decides whether one partner may receive a payment the others do not. If the others got no matching amount, their capital accounts now differ, and the books should show it.
• Guaranteed payments. Do not call a tax payment a guaranteed payment unless the agreement makes it one. See guaranteed payments vs partner draws.
• Which partner. Name the partner on every payment. Each estimate belongs on that partner's own return and account.
• Tax the partnership pays for a foreign partner. The partnership owes this withholding itself, and the Form 8804 instructions treat what it pays for a partner as a distribution to that partner (IRS). See foreign partners and withholding.

How do I book S corp estimated taxes paid from the business account?

Book an S corporation shareholder's estimated tax paid from the company account as a distribution to that shareholder, then check whether the other owners need matching distributions. An S corporation passes its income to its shareholders, who use Form 1040-ES for their own estimates (IRS). The company has no deduction for it: Form 1120-S line 12 bars federal income taxes (instructions).

Matching matters because an S corporation may have only one class of stock: every share must carry identical rights to distributions and liquidation proceeds under the governing documents. A payment for one owner alone is a distribution that differs in timing or amount, and the regulation says such distributions are given "appropriate tax effect" on the facts (26 CFR 1.1361-1(l)). The IRS has said it will not treat disproportionate distributions as a second class of stock when the governing documents give identical rights (Rev. Proc. 2022-19), but the books should still show the difference.

One way to match is to divide the payment by the paying owner's share of the stock. That gives the total distribution, and each other owner receives their share of it. The example below works one through. An advance fits only if the governing documents require repayment or an offsetting cut in that owner's later distributions. See unequal S corporation distributions.

If the company paid the tax as extra pay to an owner who is also an employee, it is generally treated as wages, not a distribution; see owner tax paid by electronic transfer on an S corporation salary. For the entry, see recording S corporation distributions. For how much an owner pays and from whose account, see S corporation estimated tax payments.

Which income taxes does an S corporation itself owe?

A few federal taxes fall on the S corporation itself, and they generally arise only when the company has C corporation history (Form 1120-S instructions).

The company pays estimated installments for the first three of these taxes; the threshold and dates are in S corporation estimated tax payments.

Book these as the company's own tax, in accounts separate from owner distributions. On accrual books, record estimated installments as prepaid tax, then move the year's total to income tax expense. LIFO recapture is different: it is figured for the last C corporation year, and its later annual installments pay down the payable set up then (Form 1120-S instructions). For LIFO inventory received from a C corporation, ask the preparer for the opening entry. The return deducts none of them on line 12 except the part of the built-in gains tax allocable to ordinary income (instructions).

How do I book federal and state income tax for a C corporation?

On accrual-basis books, a C corporation books its own tax as an expense and a liability, using a prepaid-tax asset for estimates. It pays estimates by installment; see how C corporations are taxed for the rate, the installment rule and filing.

Cash-basis books record the tax when paid; ask the preparer which method the return uses.

Keep federal and state income tax in separate accounts. Form 1120 line 17 excludes federal income taxes from the deduction but not state income taxes imposed on the corporation (instructions; 26 U.S.C. 164). The preparer reconciles book and return income on Schedule M-1 or M-3 (instructions).

An owner's personal tax paid by the corporation is not the corporation's tax. See C corporation paying owner expenses.

Is a state pass-through entity tax an expense or an owner payment?

Where a state imposes the tax on the partnership or S corporation itself, it is the entity's tax and an entity expense. IRS Notice 2020-75 says state income taxes imposed on and paid by a partnership or S corporation are deductible in computing its non-separately stated income (the profit figure on each owner's Schedule K-1) for the year of payment, and that taxpayers may rely on it before the proposed regulations issue (Notice 2020-75). The deduction lowers the business profit shown on the owners' Schedule K-1 instead of appearing as a personal deduction.

This table shows the federal-return treatment. Whether and how a state taxes the entity is set by that state's law.

For the row about tax paid or withheld for particular owners, the S corporation regulation treats the company's payment of state income tax for some shareholders as if it had paid each of them a distribution, or as an advance if the governing documents require repayment or an offsetting cut in their distributions (26 CFR 1.1361-1(l)). Whether to elect a pass-through entity tax is covered in pass-through entity tax election.

How do I book a penalty or interest on a late tax payment?

Split the payment into tax, penalty and interest, and give each its own account. A balance due can include tax, penalties, additions to tax and interest (IRS). Take the split from the notice, not from the bank line.

• The tax is the owner's. The whole payment, penalty and interest included, is the owner's draw or distribution.
• The tax or the penalty is the entity's (a C corporation's tax, an entity-level state tax, or the entity's own late-filing penalty). Book the penalty in its own account and treat it as not deductible. A deduction is generally not allowed for fines or similar penalties paid to a government, and the regulation extends that bar to penalties on taxes and to interest on those penalties (26 CFR 1.162-21). The Schedule C, Form 1065 and Form 1120-S instructions say the same, and the two pass-through returns report such amounts as nondeductible expenses on Schedule K.
• Interest. Interest on an individual's underpaid income tax is personal interest and is not deductible, even when the income came from the business (26 CFR 1.163-9T; 26 U.S.C. 163). The regulation treats an entity's own interest differently, depending on the tax. Keep interest in its own account, apart from the tax and the penalty, and let the preparer set the treatment.

For penalty amounts and relief, see late filing and payment penalties.

I already booked these payments as an expense. What now?

First work out whose tax each payment settled. Move only an owner's personal tax to that owner's draw or distribution account, dated as the original payment, so profit and loss and the IRS account line up. Keep the entity's own taxes (a C corporation's tax, an entity-level state tax) in tax accounts and reconcile its installments, expense and payable. A bookkeeping change does not change the taxpayer or year the IRS credited. What you can change depends on where the year stands.

• The year is open and no return is filed: reclassify the entry and keep the confirmation with it.
• The year is closed or the return is filed: the old figures may already be on a return, and a change can mean an amended return. Show the preparer the original entry and the confirmation first.
• Several owners or years are mixed: the fix depends on whose tax each payment was and which year the IRS applied it to, which the account history shows.

What should I give my preparer so the payments match IRS and state records?

Give a list of every payment with its date, amount, tax, tax year, whose tax it is and the account it left, plus proof of each. The books, the bank, the IRS account and the state account should show the same payments.

• Confirmations for each payment.
• Account history. An individual's IRS online account shows payment history (IRS). For a partnership or corporation, keep its own payment confirmations and ask the preparer to pull the entity's IRS account record. Add the state account's history.
• Credits carried forward. An overpayment applied from the prior-year return counts as an estimated payment on this year's return, but no cash left the bank (Form 1040 instructions; Form 1120 instructions).
• Election papers. The S election (Form 2553), any entity classification election (Form 8832) and any IRS letter about them (Form 2553 instructions; IRS).
• Notices. If the IRS removes a payment it says was applied in error, its notice page says to mail proof of payment to the address on the notice (IRS).
• For a partnership or S corporation: which owner each payment was for, and each owner's matching distributions.

Example

These examples are illustrative. All figures are in US dollars.

Single-member LLC

The owner of a single-member LLC with no election pays $6,000 of federal and $1,500 of state estimates from business checking. All $7,500 is a draw: debit owner's draw, credit checking. Schedule C net profit does not change. The federal $6,000 is claimed on the owner's Form 1040 as estimated payments, and the state $1,500 stays a personal payment. Had it been booked as tax expense, book profit would sit $7,500 below the Schedule C figure.

S corporation owned 60/40

The company pays $6,000 of the 60% owner's federal estimate. Paying only that owner is a one-sided distribution. One way to match is to divide $6,000 by 60%: total distributions of $10,000, of which $6,000 is that owner's tax payment and $4,000 goes to the 40% owner. Book $6,000 to the first owner's distributions account and $4,000 to the second's. If the second payment lags, record when it was made.

C corporation

A C corporation with $200,000 of taxable income, equal to its book pre-tax income, assumes a flat federal rate of 21% and no state tax, so tax of $42,000. It pays four installments of $10,500, each debited to prepaid income tax. At year end it debits income tax expense $42,000 and credits prepaid income tax $42,000, leaving no balance. If the return instead shows $45,000 of tax, expense is $45,000 and $3,000 stays in income tax payable until paid.

Different for you?

• You paid estimates from the business account for months, and the year-end books and the IRS account disagree, or a corporation's installments, expense and payable do not tie to its return: a payment may sit in an expense account, in the wrong year or under the wrong number. Sorting it takes the books, both account histories and the entity's elections side by side. Start with catching up on overdue books, and get business tax help or bookkeeping help.
• An S corporation paid one owner's tax from company money and the others received nothing: the distributions may no longer follow ownership. See unequal S corporation distributions and get business tax help.
• The S corporation moved an owner's tax through payroll: see owner tax paid by electronic transfer on an S corporation salary.
• A C corporation paid an owner's personal tax: see C corporation paying owner expenses.
• A payment was missed or late, a penalty notice arrived, or a notice says a payment was moved or removed: see late filing and payment penalties, and get business tax help if the notice and your records disagree.
• The partnership paid withholding for an owner who lives abroad: the partnership owes it, and it counts as a distribution to that partner. See foreign partners and withholding and get cross-border tax help.
• Spouses or a family own the LLC: see spouse and family LLCs.
• Personal and business money are mixed: see fixing commingled funds.