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


How to Start an S Corp as a Seamstress

An S corporation (S corp) is an Internal Revenue Service (IRS) tax classification that may help your seamstress business save money on its taxes. Seamsters are individuals who sew for a living. Whether they make custom quilts to sell online or run a clothing repair business, these individuals can find demand for their sewing skills anywhere. 

Regardless of if your sewing business is fairly new or has been around for many years, electing S corp status 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.

Seamstress with apron working at sewing machine.

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 seamstress 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 seamstress 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 Seamstresses 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 of S corps must pay themselves a “reasonable” salary — the equivalent to what someone else doing the same work would earn. Online resources like Glassdoor and the US Bureau of Labor Statistics can help you find salary averages and pay scales to inform your decision about your reasonable salary.

The average salary of a seamstress in the United States is $34,666. Several factors can affect this number, such as your level of experience and location. A fashion designer makes an average of $58,932 a year, for example, and those who work in cities tend to earn more than those in rural areas due to the higher cost of living. Remember to consider variables like this when doing your research so you pick a salary that’s both reasonable for your work and achievable by your business.

Distributions

Unlike with a 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 Seamstress 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.

Seamstress Business Information

Seamstresses make their living by sewing. This can come in many different forms — from designing clothing in the fashion industry to creating tapestries and quilts to repairing clothing for customers. Demand for skilled seamsters exists everywhere, making this a valuable job nationwide.More than 45,000 seamstresses currently work in the United States. Remember that tailors and seamstresses work in different professions so they don’t share average salaries or other statistics.

Why Most Seamstress Businesses Should Have a Legal Business Entity

Liability protection is the main reason you should register your sewing business as a legal business entity. If your business ever finds itself in legal trouble, this’ll protect your employees from liability so only the business itself will face the lawsuit.

For example, let’s say a historical society hires you to repair some clothing once owned by prominent local historical figures. A majority of your work goes well, but the stitching on a dress tears after you complete your work and it ruins the garment. The historical society attempts to sue you for destroying its property and for the turmoil this caused the family of the historical figure. If this goes to court, the historical society can only sue your business. That means your personal assets will remain protected.

Is an S Corp Right for My Seamstress Business?

Your business must meet certain requirements in order to qualify for the S corp tax designation. Consider the following requirements — along with your business’s long-term goals — when deciding whether or not to elect S corp status.

First, the IRS requires S corps to run payroll for all of their employees — including their owners. Businesses with multiple employees likely already pay a service to run payroll for them, making this an nonissue. In contrast, solo businesses may see this as a costly expense when compared to what they might save on their taxes as an S corp. Weigh the costs of both before you decide if electing S corp status is right for you.

Second, you’ll also need to think about your business’s shareholders because S corps have a 100-shareholder limit. Your total number of shareholders will entirely depend on your networking and connections so this may not be a problem. Still, some businesses will want to seek out more than 100 investors. Businesses like that likely will benefit more from becoming a C corp than an S corp.

Lastly, the IRS requires S corp owners to take a distribution from their business’s net profits in addition to their reasonable salary. Ideally, you’d take at least $10,000 as your distribution in order to receive the full tax benefits of S corp status. If you’d rather reinvest that money in your business, the S corp tax designation isn’t a good fit for your business and you should probably have the IRS tax it as an LLC instead.

Seamstress S Corporation Examples

Not all sewing businesses will benefit from the S corp tax designation. Here are two examples to help illustrate which types of seamsters should elect S corp status.

Scenario 1:

Imagine you run a sewing business in which you create one-of-a-kind clothing and sell it from a storefront you own. You sell these clothes at a premium price because they’re unique and entirely handmade. You and your staff of four other seamsters handle all clothing creation, sales, and customer service for the store. 

Your business runs payroll for all five of you, who also are shareholders in the company. After a meeting, you determine the five of you are satisfied with the business and hope to continue operations for the next three years or so without any major changes. 

A business like this is a good fit for the S corp tax designation because it already runs payroll and has fewer than 100 shareholders. As long as you pay yourself a reasonable salary and take a distribution, you should have no issue electing and maintaining S corp status.

Scenario 2:

Now, let’s say you run a business as a single seamster. Currently, you make handmade, custom quilts online and sell them through an Etsy store. Your business has seen a boost in sales recently because you also started selling quilts through a local fabric store. 

As orders come in faster than before, you’re starting to have trouble keeping up with them. Ideally, you want to hire another seamster or two to help you fulfill the orders and maybe handle customer service matters going forward. You’d also like to create a dedicated work area on your property so you don’t have to use your kitchen anymore. 

A business like this should avoid becoming an S corp right now. Paying to run payroll before you have other employees can create an unnecessary expense. In addition, reinvesting money back into the business to hire people and create a dedicated workspace will be a better use of your funds than taking a distribution.

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 of March 2023, the average salary of a seamstress in the United States is $34,666. Factors like location and experience can, however, affect this. For example, Glassdoor puts the most common pay scale for a seamstress at $31,000 to $44,000 per year. Do some research on your work and local area before committing to a reasonable salary for you and your business.

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. Employees can invest in your business and become shareholders. This won’t happen automatically, though, so you’ll have to allow it and approve them.

The IRS recommends S corps file on a quarterly basis if they expect to owe more than $1,000. While you don’t have to do that, it’ll make filing your taxes easier.