Last Updated: June 6, 2024, 2:59 pm by TRUiC Team


How to Start an S Corp as a Carpenter

An S corporation (S corp) is an Internal Revenue Service (IRS) tax classification that may help your carpentry business save money on taxes. Carpenters do construction work in which they shape and install building materials. Most commonly, they work on frameworks like walls and floors. 

Whether your carpentry business is fairly new or has been around for many years, electing to be taxed as an S corporation can potentially save you thousands of dollars each year.

Recommended: Save yourself the hassle and use a professional service like ZenBusiness to help you handle the initial S corp election paperwork.

Smiling carpenter carrying boards.

What Is an S Corporation?

An S corporation (S corp), also known as Subchapter S, is a tax status with strict IRS requirements and restrictions. If your business meets the requirements to be taxed as an S corporation, you will be eligible for certain tax benefits such as pass-through taxation and self-employment tax savings, which can be significant. 

Essentially, an S corporation provides the perfect opportunity for business owners to have both the benefits of a default LLC with pass-through taxation and some of the perks of a C corporation without the dreaded double taxation. 

S Corp Requirements

In order to be taxed as an S corporation, your carpentry business must meet the following requirements:

  • Has 100 shareholders or less
  • Is a domestic LLC or corporation
  • Issues only one class of stock
  • Shareholders are US citizens or permanent resident aliens
  • Is owned by private individuals

What Type of Business Structures Can Start an S Corp?

An S corp designation can be elected by a formal business structure, specifically an LLC or a corporation. Informal business structures such as sole proprietorships and partnerships are not eligible for the S corporation classification. 

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Don’t have a formal business structure? If your carpentry business isn’t currently an LLC or C corporation, our friends at ZenBusiness can form your legal business entity for you and elect S corp tax status in no time.

S Corp Tax Benefits Carpenters Should Know About

S corporations enjoy certain tax benefits, such as pass-through taxation (all losses and profit — credits, distributions, deductions — pass directly to the owner). This is similar to how default LLCs are taxed. With pass-through taxation, all profits bypass the company and go directly to the owners, and owners pay on their personal tax return at their regular income tax rate.

Default LLC Taxes Explained

Business owners of default LLCs pay self-employment taxes and income tax on the distributions passed down to them. In other words, both types of taxes are imposed on all the money they receive after paying business expenses. Self-employment taxes include social security and medicare, and these two taxes.

S Corp Taxes Simplified

With an S corporation, owners are classified as employees and are paid in two ways: a salary and distributions.

Reasonable Salary

Since owners are employees, they must receive a salary, and therefore they must run payroll. Business owners pay self-employment taxes and income tax on their salaries. Owners must pay themselves a “reasonable” salary to be an S corp. A reasonable salary is a salary that is equivalent to what someone doing the same work would be paid. Online resources like Glassdoor and the US Bureau of Labor Statistics can help you find pay scales and averages you can base your reasonable salary on.

As of March 2023, the average salary of a carpenter in the United States is $48,320. This number can change depending on your location and level of experience as a carpenter. Be sure to account for this when doing your research to choose the best salary for your needs and the needs of your business.

Distributions

Unlike with the reasonable salary, the owner only pays income tax on the distributions. This means the business owner does not pay the self-employment tax of 15.3% on money taken as a distribution.

When Should a Carpenter Elect S Corp Status for a Business?

This is a subjective question and will depend on your business and your goals. You need to be sure to take enough money in distributions to benefit from the advantages offered by an S corporation and offset the additional paperwork and fee associated with running payroll. In general, you will likely benefit from S corp status once your business makes at least $60,000 in earnings and $20,000 in annual distributions. These numbers are after paying business expenses. The IRS requires S corp owners to pay themselves a reasonable salary to ensure they aren’t lowering their compensation to avoid paying more on taxes — which would lead to loss of S corp status, fines, and even business dissolution.

Use our S Corp Tax Calculator to find out if an S corp is right for your business. Calculate your savings below:

S Corp Savings Calculator

Calculate how much you can save by choosing an S Corp tax classification

Recommended:

Are you a solopreneur looking to start your S corp or convert your existing LLC and start saving on taxes? Get your S corp started today with ZenBusiness.

Six Basic Steps to Start an LLC and Elect S Corp Status:

Step 1: Select a State

Step 2: Name Your LLC

Step 3: Choose a Registered Agent

Step 4: File the Articles of Organization

Step 5: Create an Operating Agreement

Step 6: Get an EIN and File Form 2553 to Elect S Corp Tax Status

Step 1: Select Your State

Step 2: Name Your LLC

If you don’t already have a business, you will first need to form one. You will need to provide your state with a unique name that is distinguishable from all registered names when you file your LLC’s formation documents.

Our Business Name Generator and our How to Name a Business guide are free tools available to entrepreneurs that need help naming their business.

Step 3: Choose an LLC Registered Agent

Your S corp registered agent will accept legal documents and tax notices on your business's behalf. You will list your registered agent when you file your LLC's Articles of Organization.

Step 4: File Your LLC's Articles of Organization

The Articles of Organization, also known as a Certificate of Formation or a Certificate of Organization in some states, is the document you will file to officially register an LLC with the state.

Step 5: Create an LLC Operating Agreement

An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.

Our operating agreement tool is a free resource for business owners.

Step 6: Get an EIN and Complete Form 2553 on the IRS Website

An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business. 

EINs are free when you apply directly with the IRS.

Elect S Corp Tax Status

During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.

Steps to Take After Starting an S Corp

Once you formalize your S corp, be sure to get your financials in line so you are ready to begin operating.

For business banking, check out our guide on the best banks for small businesses.

If you need to build your S corp credit, read our guide on how to build business credit and get a business credit card through Divvy.

Recommended: You’ve worked hard and deserve a break! If you make at least $20,000 in distributions, let ZenBusiness start your S corp, so you can focus on your business.

Carpenter Business Information

Carpenters do construction work on homes and buildings by shaping and installing materials. A good deal of their work focuses on frameworks like floors, walls, and doorframes. Data from September 2022 put the estimated number of carpenters working in the US near 380,000. Carpentry is a valuable profession anywhere since construction is universal, meaning a carpenter is likely to find work wherever they go.

Why Most Carpenter Businesses Should Have a Legal Business Entity

Liability is the main reason that your carpentry business should have a legal business entity. Should your business be caught up in a lawsuit, your employees would be protected from losing their personal assets by having a legal business entity. For example, say you are hired to work on an addition for a home. When leaving for the day, your vehicle loses control and damages the home, with the owners trying to sue you over the damage. With your legal business entity, the clients could not sue you personally, only the business meaning your personal assets will be protected.

Is an S Corp Right for My Carpenter Business?

To become an S corp, your business will have to meet certain criteria. Consider the following requirements and the long-term goals you have for your business when deciding whether to become an S corp.

All S corps are required to run payroll for all of their employees. This applies even if you work solo and are your only employee. Businesses that have multiple employees are likely to already run payroll, so this will be less of an issue. But for solo employee businesses, the money you would save on your taxes as an S corp may not be worth it when compared to the cost of running payroll.

Businesses that want to get extra funding through additional investors may have a problem with becoming an S corp. S corps are limited to a maximum of 100 shareholders for their entire operation. If 100 is insufficient for your needs, your business may want to become a C corporation rather than an S corporation.

There is also the matter of distribution. Owners of S corporations are required to take a distribution from the business’ net profits in addition to their reasonable salary. You are advised to take at least $10,000 for your distribution to get the full tax benefits of becoming an S corp. If you would rather reinvest that money back into your business for upgrades or other reasons, an LLC will likely be a better fit.

Carpenter S Corporation Examples

Not all carpentry businesses will benefit from an S corporation. Here are two examples to help illustrate which types of carpenters should elect S corporation status.

Scenario 1:

Imagine you run a carpentry business in your hometown. The business consists of you and five other carpenters, all of which work together on projects that your business is hired to complete. You have been running payroll on your employees for several years now and have kept twelve shareholders. Though you plan to expand to fifteen shareholders, you do not expect to exceed that number. Your business has gained notoriety and has become one of the most popular businesses in your town, with your number of clients tripling over the past year. All of this extra income is mostly staying put since you have no large plans for expanding the business.

This carpentry business is a good candidate for becoming an S corp. Since you run payroll and sit below the maximum number of shareholders, the only concern would be the distribution. As long as you can afford your business expenses, pay yourself a reasonable salary, and take at least $10,000 as a distribution, you will be well on your way to being taxed as an S corp.

Scenario 2:

Now imagine you are an independent carpenter that works out of your garage. You are hired by general contractors and other construction companies to assist with construction efforts through your expertise. Currently, you are the only employee of your business and use your personal vehicle to travel to job sites. Ideally, you would like to expand the business, but for now, you are trying to stay small and save money. The one expense you do need to pursue is a new truck so that your personal vehicle can be used less. 

This business should avoid becoming an S corp. Since you are the only employee, running payroll will be costly and likely unnecessary. In addition, the money you would have to take as a distribution will counteract your plans to save money and purchase a new truck.

Start an S Corp FAQ

An S corporation (S corp) is a tax classification that an LLC or a corporation can apply for that provides self-employment tax savings on distributions.

If you already have an LLC or C corporation, you can form an S corp by filing Form 2553 with the Internal Revenue Service (IRS).

S corps offer businesses tax advantages, and owners of S corps can save thousands of dollars on self-employment taxes.

While both LLCs and S corps benefit from pass-through taxation, they are not taxed the same way.

With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax. With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.

Both LLCs and S corps benefit from a provision in the Tax Cuts and Jobs Act of 2017 that allows qualifying owners of pass-through entities to deduct 20% of qualified business income (QBI) from their tax returns. However, for S corps, the deduction doesn’t apply to profits paid out as wages.

According to Glassdoor, the average salary of a carpenter in the US is $48,320 as of March 2023. This number is bound to change for you depending on your level of experience and the location in which you work. Be sure to account for this when doing research and selecting your reasonable salary.

A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employees’ salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.

There’s no corporate tax rate for S corps. Instead, owners of S corps pay personal income tax on the company’s profits. This rate depends on each owner’s personal income tax bracket. 

In some states like California and New York, S corps may pay some form of tax at the corporate level.

Yes, as long as they are relevant to and used for the benefit of your work. These items can still be claimed on your taxes as any other self-employed business would.

Yes, as long as you also have ownership over the account. For example, the distribution could go to an account you share with a spouse, but it could not go to an account owned by your spouse.