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


How to Start an S Corp as a Graphic Designer

An S corporation (S corp) is an Internal Revenue Service (IRS) tax classification that may help your graphic design business save money on its taxes. Graphic designers use their eye for marketing to create memorable images and designs for their clients — usually for the purpose of advertising or promoting their services. 

Regardless of how long your graphic design business has been open, it could potentially save thousands of dollars each year by having the IRS tax it as an S corp.

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

Graphic Designer looking at color palettes.

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 graphic design 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 graphic design 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 Graphic Designers 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. When electing S corp status, you must disclose what you plan to pay yourself as the owner. This enables the IRS to confirm it’s a “reasonable” salary that’s equivalent to what someone else doing the same work would earn. One of the easiest ways to research pay ranges to decide what fits best for your level of experience involves using an online resource like Glassdoor or the US Bureau of Labor Statistics.

In the United States, the average annual salary for a graphic designer is $44,635 as of March 2023. This data comes from Glassdoor, but it can vary based on how much experience you have and where you work. On average, graphic designers in cities and urban areas make more than those in rural areas due to the higher cost of living in more populous locations. Remember to account for these variables when determining your reasonable salary.

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 Graphic Designer 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 LLCs 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.

Graphic Design Business Information

Graphic designers combine text and imagery to create appealing images for their clients — typically logos and other materials used to drive business. This kind of work is useful just about everywhere because any kind of business could benefit from a graphic designer sprucing up its brand materials. Still, most graphic designers work in large cities and urban areas that boast a denser population of potential clients. 

According to the US Bureau of Labor Statistics, the country has more than 200,000 graphic designers currently employed with that number expected to rise year over year.

Why Most Graphic Design Businesses Should Have a Legal Business Entity

Liability is the most important reason for ensuring your graphic design business is a legal business entity. If a third party tries to take legal action for something done on behalf of your business, this means they can’t sue you or your employees — only the business itself. 

For example, let’s say you design a logo for a local business that accidentally has many similarities to a foreign company’s logo. That foreign company tries to sue for copyright infringement. With this liability protection, a court could only take your business’s assets in a settlement and not your personal assets.

Legal business entities also benefit from increased legitimacy. Clients and other businesses likely will take you more seriously if they see you have a formal business structure.

Is an S Corp Right for My Graphic Design Business?

Your long-term goals will help you determine if electing S corp status is the right move for your business. To become an S corp, you must run payroll for all of your employees — including yourself. Businesses with multiple employees likely already run payroll, but paying for payroll may be an obstacle for smaller businesses or solo graphic designers.

You also need to consider if you want to take on new investors and increase your number of shareholders. S corp status limits your shareholders to a maximum of 100. If you exceed that number, you’ll either need to negotiate to return some shares or pass on electing S corp status. This may not be a problem for some businesses, but it can be a make-or-break issue for those looking to add lots of investors.

Finally, there’s the matter of taking a distribution. A major requirement for any S corp is that the business owner must take a distribution from the profits on top of their reasonable salary. To reap the full tax benefits offered by S corp status, you should take at least $10,000. Again, this may seem fine for some businesses. If you’d rather reinvest that money into your business to grow or make upgrades, the S corp tax designation may not suit you right now.

Graphic Designer S Corporation Examples

Not all graphic design businesses will benefit from electing S corp status. Here are two examples to help illustrate when it can prove advantageous for a business to choose the S corp tax designation.

Scenario 1:

Imagine you run a graphic design business in a large city from a small office you share with a photography studio. You have a steady set of clients, you make a more than satisfactory amount of money, and you’re quite content with your business. Your employees also seem pleased, and they’ve noted they intend to stay with your business for the foreseeable future. 

If you were to start running payroll, this would be an ideal situation for electing S corp status. Running payroll would fill a major need and, as long as you limit your shareholders and take a distribution of at least $10,000, you’d have no issue being taxed as an S corp.

Scenario 2:

Now, let’s say you run a freelance graphic design business from your home in your spare time. Currently, you still have an office job and do most of your graphic design work in the evenings and weekends. You hope to one day have your own office and employees, but that’s just not possible right now. Your current priorities include finding investors interested in your business and saving as much of what you earn so you can upgrade your drawing tablet and purchase a better computer to run your software. 

S corp status isn’t a great fit for the business in this scenario because you’re actively seeking more investors and reinvesting your profits back into the business. Moreover, the cost of running payroll for only yourself would probably exceed the tax savings S corp status could offer you.

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.

In the United States, the average annual salary of a graphic designer is $44,635. Of course, this will vary based on your level of experience and where you work. Like most jobs, working in a large metropolitan area usually means you’ll earn more due to the higher cost of living when compared to more rural areas.

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.

You can submit a statement of revocation at any time after electing S corp status. You should submit this through the IRS service center you use to file your business’s tax returns.

No. While you, as the owner, can only receive your reasonable salary and distribution, there is no income limit on the S corp itself.