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To my understanding of S-Corps in the US, at the end of the year all money left in the corporate account is "profit." This money is distributed to the owners who pay income taxes on it.

Invoices sent to my clients are generally paid on the 15th. This income is too late to draw payroll for that month (paid twice a month, 1st and 15th) so informally they're earmarked for next month. For the income on Dec 15th, this means money earmarked for payroll in January is sitting in the account on Dec 31st.

Do I have to pay income tax on it just to pay income+fica on it when it eventually pays out in January? Or is there a way to mark it as "not profit" for the sake of taxes?

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If you use an accrual method of accounting, then you may be able to advance certain deductions in year 2021 that won't be paid until 2022. If you use a cash method of accounting, than Dec 31 is the hard cutoff.

As the owner you have control over such things. You could cut yourself (or other employees) an extra payroll check outside of regular payroll on or before Dec 31 and still deduct it this year if you wish. Or not, since presumably you would have this scenario every year, and next year when you file 2022 you'll get a larger deduction because of the Jan 2022 payroll. Maybe you already are getting it this year for payroll back in Jan 2021 which was based off of receipts from Dec 2020. In the long run it should be close to a wash.

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You should really talk to your accountant.

It's not clear what you're describing, you're talking about invoices and payroll in the same sentence, but they're not the same. If you get an invoice, it goes to accounts payable, and if you have earnings that you want to keep in the corp it goes to retained earnings. When you need to pay the invoice, it goes credit to accounts payable and debit to retained earnings.

Which tax year you deduct the invoice payment depends on your accounting method.

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  • Sorry my accounting vocab isn't very good. I should talk to my accountant, this is true, but being the curious type I tend to run my books day to day. When I say "I get invoices paid..." I mean "my client pays their monthly invoice on the 15th". This income into my cash basis accounting is generally earmarked for next month's payroll plus some profit. If that helps clarify, great.
    – foreverska
    Commented Dec 15, 2021 at 18:46
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    @foreverska in this case you either withdraw payroll early or deal with retained earnings accounting, pretty simple
    – littleadv
    Commented Dec 16, 2021 at 0:27
  • I almost fell out of my chair when I saw who wrote this answer. Welcome back!
    – TTT
    Commented Dec 16, 2021 at 15:28
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    @TTT yeah, surprisingly my account is still intact :-D
    – littleadv
    Commented Dec 16, 2021 at 18:41

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