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


How to Start an S Corp as a Freelancer

An S corporation (S corp) is an Internal Revenue Service (IRS) tax classification that may help your freelance business save money on taxes. With a freelance business, circumstances vary as to whether an S corp is best for your business, since one Freelancer's day to day can look different from another freelancer's.

Continue reading our step-by-step guide, How to Start an S Corp as a Freelancer, to learn more about S corporations and see if an S corp will benefit your freelance business.

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

Freelancer working in her home office.

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 freelancer 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. 

How to Start an LLC Tip Icon

Don’t have a formal business structure? If your freelancer 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 Freelancers 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. To become an S corp, you must pay yourself a “reasonable salary,” essentially the salaried pay that someone would be paid for the same position. This is less straightforward for freelance businesses as being freelance could mean your business could specialize in a variety of jobs and positions — all with their own individual salaries and payscales. 

To get an idea of what current salaries for your work look like, you can visit Glassdoor and the US Bureau of Labor Statistics. Some average annual salaries, according to Glassdoor, for freelance positions are $50,475 for freelance writers, $46,898 for freelance web designers, $51,848 for freelance accountants, and $40,888 for freelance photographers.

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 Freelancer 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 Generatorand 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.

Freelancer Business Information

Freelance businesses exist all over the country, with some even operating internationally. There are thousands that operate each day, and as mentioned above, they can center around all kinds of projects and tasks like writing, design, photography, and more. Typically these businesses will be contracted to work for a set period of time or until the completion of a project set by the client that hires them.

Why Most Freelancer Businesses Should Have a Legal Business Entity

By being a legal business entity, the business itself is made liable for any incidents rather than the individual. For example, if you operate a freelance writing business and breach a nondisclosure agreement with your client, which leads to a lawsuit, the business itself would be sued rather than you as a person. This protection can keep you from financial ruin if something terrible happens.

In addition, a formal business structure gives legitimacy to your work as more clients are likely to hire a business rather than a lone freelancer for important work, as well as tax benefits like being able to customize tax strategy and structure.

Is an S Corp Right for My Freelancer Business?

This question will depend on the type of business you operate and your long-term goals. If you are a solo web developer, you will need to pay yourself a reasonable salary and run payroll once you elect S corporation status. The tax savings you receive may not be worth the additional cost of payroll. However, if you are a freelance artist already paying a team, you may already run payroll, and there is no added expense to this. 

Maybe you want to scale your consulting business and begin taking on extra funding. If you are seeking out investors, an S corporation’s limit of 100 shareholders or less would not suffice, and your freelance consulting business would be better off as a C corporation.

Then, to benefit from S corp status, it is recommended that your business make enough to pay you at least $10,000 in distributions on top of the reasonable salary. Failing to take a large distribution means you will not benefit from the tax advantages offered by an S corporation, and this may indicate that a default LLC may be best for the moment. So if you’re a freelance photographer and want to put a sizable portion of your money into upgrading your equipment, you might choose not to take a distribution and instead invest that money back into your business.

Every business is different, and it will be up to you to decide if your freelance business should be taxed as an S corporation.

Freelancer S Corporation Examples

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

Scenario 1:

Imagine you run a freelance accounting business near a large city. You hire freelance accountants to work with your business and run payroll for them, along with some other staff that works the phone lines and handles customer support. Each year you have been increasing in profits and are satisfied with where your business has reached. 

In this situation, you would be in good standing to adopt S corporation status as you would have no problem taking a distribution from your growing profits and are already in the practice of running payroll for your employees.

Scenario 2:

Conversely, imagine you operate a freelance web design business. You work alone with no other employees except temporary designers for larger projects. Despite working alone, you have garnered some attention from your corporate clientele and are considering expanding your business in the years to come. Some of your former clients are even in talks to invest in your business as you further establish yourself. 

For this scenario, it may not be in your best interest to become an S corp. As you are looking to expand your business, putting profits back in would be wiser than taking them out as a distribution, and since you are gaining investors, you may exceed the limited 100 shareholders if you continue on this path.

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.

Salaries for freelance work vary greatly on the profession itself. For example, the average annual salary of a freelance photographer is $40,888, while the average annual salary of a freelance accountant is $51,848. Expect somewhere between $35,000 and $50,000 but be sure to use online resources like Glassdoor to find and compare salary ranges to determine what works best for you.

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, a stipulation of having the S corp status is that you must run the payroll on your business. This applies even if you are the only employee that is paid. If you wish to avoid this, you should consider remaining an LLC.

To be considered an S corp, your business is required to operate as a domestic corporation or domestic LLC. However, you would still be able to do freelance work for clients that live outside of the United States. You could even have foreign shareholders as long as your total number of shareholders remains below 100 total.