Last Updated: June 10, 2024, 9:36 am by TRUiC Team


How to Start an S Corp as a Plumber

An S corporation (S corp) is an Internal Revenue Service (IRS) tax classification that may help your plumbing business save money on its taxes. Plumbing businesses vary and a local one-person enterprise may have different needs than a regional plumbing company.

Regardless of your business’s size or location, though, electing S corp status may prove advantageous — potentially saving you thousands of dollars at tax time.

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

Plumber researching how to start an S Corp.

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 plumbing 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 plumbing 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 Plumbers 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. The IRS must consider the salary you pay yourself as “reasonable,” which means equivalent to what someone else with your job would receive for performing the same work. To get an idea of what you should pay yourself, use a resource like Glassdoor or the US Bureau of Labor Statistics to compare salaries and decide what amount is best for you.

According to Glassdoor, the annual average salary of a plumber in the United States is $51,268. Salaries tend to vary by location, however, so remember to factor that in when choosing your reasonable salary amount. For example, the annual pay of a plumber in St. Louis, Mo., is $59,793 while plumbers in Tallahassee, Fla., earn $51,676 and those in Philadelphia, Pa., can expect to earn $54,810.

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 Plumber 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 inline 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.

Plumbing Business Information

As a profession that’s needed everywhere, plumbing typically involves the replacement of ineffective or broken water pipes and the maintenance of household sinks, toilets, and showers. Issues regarding piping and water flow can strike at any time — unbeknownst to property owners. No matter where you live, every home or business will need a plumber at some point. 

According to IBISWorld, approximately 537,211 licensed plumbers currently work in the United States and 126,929 plumbing businesses had active operations as of January 2023.

Why Most Plumbing Businesses Should Have a Legal Business Entity

The main reason you should register your plumbing business as a legal entity is that it’ll protect your employees — including yourself as the owner — from liability should a third party ever take legal action against your business. If you accidentally break a water line and damage some furniture while working in a client’s home, for example, they could try to sue you. If your business is a legal entity, the client could only sue your business and not you as an individual.

Legal business entities also benefit from increased legitimacy among potential clients and investors. Clients are more likely to hire a plumber with an actual business structure, and this also can make it easier to attract investors or grow your business.

Is an S Corp Right for My Plumbing Business?

You must consider many factors to determine if electing S corp status is right for your plumbing business. First, as noted above, you must pay yourself a reasonable salary and run payroll for all employees in order to qualify for S corp status. If you have multiple employees and already run payroll, this won’t be an issue, if you’re the sole employee, however, the money you’d save on taxes as an S corp may not justify the additional cost of running payroll.

If you want to expand your business with support from investors, becoming an S corp may not be the best move. Per the IRS, S corps can have a maximum of 100 shareholders. If you intend to grow based on venture capital and new investors, turning your plumbing business into a C corp would work better.

Lastly, S corp status may not suit you if you want to reinvest a significant amount of money into your business. To obtain the tax benefits offered by S corp status, you must take a distribution from your business’s profits in addition to your annual salary. If you don’t take a large enough distribution, the tax savings won’t prove beneficial. When considering your finances and long-term goals, remaining a standard LLC may be the right fit for your plumbing business if you’d rather put your money back into the business than pay yourself.

Ultimately, only you will know if electing S corp status is right for your business. If you’re willing to run payroll, take a significant distribution, and limit your shareholders to 100, then this may be the right move. Remember to think about what you want your business to become before you decide to elect — or disregard — the S corp tax designation.

Plumber S Corporation Examples

Not all plumbing businesses will benefit from electing S corp status. Here are two examples to help illustrate which types should elect this tax designation.

Scenario 1:

In this first scenario, you run a plumbing business in a large urban area. Currently, you and three other plumbers work for your business along with two part-time employees who handle customer service. You already run payroll for yourself and your employees because your business earns enough each year to pay for accounting services. This business has about 20 shareholders, and you have no intention of increasing that number — at least not for a few years. 

As long as you don’t plan to expand your business, becoming an S corp would be a viable option to help you save money on taxes each year. The only concern in this first scenario is that you’ll need to pay yourself a reasonable salary and take a distribution of at least $10,000.

Scenario 2:

Let’s say you run a very small plumbing business you started last year. As the only employee, you handle the scheduling and plumbing work yourself. Currently, your business operates out of your home, you service clients within 20 miles of your house, and you drive your own vehicle to jobs. You’re thinking about getting a company truck to avoid the wear and tear on your personal vehicle and so you can carry more equipment to your jobs. 

In this scenario, it likely would cost the business more to try and qualify for S corp status than it would actually save on taxes. Running payroll for only one person would be expensive and taking a distribution may hinder your goal of investing profits back into the business to buy and insure a work 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.

As mentioned above, the average annual salary of a plumber in the United States is $51,268. However, individuals who become master plumbers can expect to earn an average salary of $102,879. Remember, a reasonable salary tends to vary based on location with plumbers earning higher salaries in cities and large metropolitan areas and lower salaries in more rural areas. In most scenarios, expect a reasonable annual salary for a plumber to fall between $50,000 and $60,000.

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.

If you have more than 100 shareholders, your business must forfeit its S corp status. If you exceed this limit, the IRS will tax your business as either an LLC or a C corp based on your business’s structure. If your business ever returns to 100 or fewer shareholders in the future, you could refile the paperwork to elect S corp status for the next appropriate tax year. 

It depends on how much you initially intended to take as a distribution. As a best practice, you should take at least $10,000 in distributions to obtain the tax benefits of electing S corp status. While taking less could be a viable option, you may want to remain an LLC for a year or so before becoming an S corp if you intend to reinvest money into your business.