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


How to Start an S Corp as a Marketer

An S corporation (S corp) is an Internal Revenue Service (IRS) tax classification that may help your marketing business save money on its taxes. Marketers work diligently to promote their clients’ products and services in order to attract more business and boost sales. Like many businesses, marketing companies may stand to benefit at tax time from electing S corp status. 

Regardless of how long you’ve been in marketing or where your business calls home, you could potentially save thousands of dollars each year by becoming 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.

Marketer working on a computer.

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 marketing 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 marketing 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 Marketers 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 qualify for S corp status, you must pay yourself a “reasonable” salary — the equivalent to what someone else doing your same job would earn. Before you decide on an appropriate figure, you should do some research to learn what other professional marketers earn to find a pay range. You also can refer to online resources like Glassdoor and the US Bureau of Labor Statistics to see the national averages for marketers’ salaries.

The average annual salary of a marketer in the United States is $57,712 as of March 2023, according to Glassdoor. This will vary by location, however, with marketers working in large cities usually earning more than those in smaller, urban areas. Keep that in mind while doing your research and deciding on 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 Marketer 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.

Marketing Business Information

Marketers work to promote their clients’ products and services to help them attract more business and increase their profitability. While this type of work can occur anywhere, most marketing businesses operate within cities and large urban areas because densely populated areas tend to have more potential clients. 

In addition, marketing businesses can either feature a group of professionals or an individual. According to data collected by IBISWorld in January 2023, an estimated 88,225 marketing/advertising agencies currently operate within the United States. However, this total doesn’t include independent marketers.

Why Most Marketing Businesses Should Have a Legal Business Entity

Registering your marketing business as a legal business entity will enhance its legitimacy. Because your business focuses on helping clients manage their reputations, those clients will feel more confident working with you if your company has a formal business structure.

Moreover, a legal business entity can protect its owner and any other employees from liability in the event a third party takes legal action against the company. 

For example, let’s say you create an advertising strategy for a client that makes one of its competitors look bad. If that competitor sues you for libel, they can only sue your business — not you as an individual — when your company is a legal business entity. That means a court settlement could only impact your business’s assets and not your personal assets.

Is an S Corp Right for My Marketing Business?

Many factors can impact whether or not your business should elect S corp status, but you should consider your long-term goals carefully and where you see your business going. If you plan to grow your business in terms of hiring more staff or seeking investor funding, S corp status likely isn’t the best move.

As discussed above, you must pay yourself a reasonable salary and run payroll for yourself and all of your employees in order to meet the IRS’s S corp requirements. While this may not seem like a huge hurdle for some companies, the cost of running payroll may deter smaller businesses. If you run a small business focused on saving as much money as possible or if you’re the only employee, electing S corp status may not prove beneficial because payroll costs could exceed what you’d save on taxes.

Maybe you hope to increase the number of investors in your business to diversify your funding sources. Per the IRS, S corps can’t have more than 100 shareholders. That limit may work for some businesses while deterring others from electing S corp status if they plan to take on many new shareholders.

You also need to consider if you, as the owner, want to take some extra money from your business’s profits for yourself or reinvest it in your business. S corp owners must not only pay themselves a reasonable salary but also take a distribution from their business profits. You’ll need to take a distribution of at least $10,000 in order to benefit from the tax advantages offered by S corp status. If you’d rather put that money back into your company, you’ll be better off remaining an LLC for now and reevaluating your business’s situation in a year or so.

As the owner, you’re the only one who can decide if electing S corp status is right for your business. Take your time and review the requirements carefully to see if this change could prove advantageous for you.

Marketer S Corporation Examples

Electing S corp status isn’t right for all marketing businesses. Below are two examples to help you decide if it might benefit your business.

Scenario 1:

Imagine you run a marketing business in a growing city that works with local businesses as well as a large corporation with its headquarters in the tri-county area. While you’re the only marketer right now, you want to hire more and already have a few part-time employees working for you. You recently talked with your accountant about running payroll and are now in the process of setting that up. 

Electing S corp status likely would benefit your business in this scenario — as long as you don’t exceed 100 shareholders. By getting payroll up and running now, you won’t have to worry about it later as you hire new workers.

Scenario 2:

Now, let’s say you started a marketing business within the last two years and operate it from your home. All of your clients are local businesses, but you aim to grow and add more large businesses to your client base. Because you decide the best way to make yourself look more professional is to work out of an office, you’re actively looking into leasing office space and finding more employees. 

Currently, this business isn’t a good S corp candidate. While hiring more employees means you’ll likely need to start running payroll, reinvesting your profits back into your business is a priority as you try to move into a more professional environment. The money you’d have to take as a distribution could go toward furthering this goal. Moreover, the limit on S corp shareholders may hinder your ability to grow as quickly as possible.

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.

The average annual salary for a marketer in the United States is $57,712. The pay range for this position varies by location, though, so take that into account when deciding on your reasonable salary. Marketers in cities tend to earn more than those working in more rural areas. For example, a marketer in Cincinnati, Ohio, will make an average of $68,987 per year, while a marketer in Saginaw, Michigan, can expect to earn an average of $55,590 a year.

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. If you’re capable of doing so, you can handle your business’s payroll process yourself. Software programs like QuickBooks can assist you, or you can use an online service like Gusto to help automate the process. Alternatively, you can hire an accountant or use an accounting service.

A business that loses its S corp status can reapply to become an S corp again, but, in general, it must wait five years to do so. This gives the business time to get everything in order and evaluate if electing S corp status will suit its needs.