How to Start an S Corp as a Software Engineer

An S corporation (S corp) is an IRS tax classification and may be the best next step for your company to help you save money! If you’re ready to start your business or just want to know how to start an S corp as a software engineer, you should know that S corps can provide business owners with self-employment tax savings on distributions, limited liability protection, and other benefits that could be useful for your business. 

You must have a formal business structure such as an LLC or a corporation to elect S corp status and meet specific S corp requirements. Learn more about starting an S corp with our step-by-step guide, How to Start an S Corp as a Software Engineer.

Recommended: If you’re a solopreneur making at least $60,000 and $20,000 in annual distributions, looking for business tax savings, let Collective elect S corp status for your new or already existing LLC. The professional service handles your paperwork, monthly accounting, and more.

What Is an S Corporation?

If you’ve been wondering how to start an S corporation (S corp) as a software engineer, you’ll probably first want to know what an S corporation is. An S corporation (S Corp) is a tax status, also known as Subchapter S, with strict IRS requirements and restrictions that your business must meet before filing IRS Form 2553 — required to make your S corp official. Once your business qualifies 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 corps offer other advantages, including asset protection.

Key Takeaways:

  • An S corp is a tax status for formal business structures such as LLCs and corporations.
  • A business must meet IRS S corp requirements (e.g. shareholders are US. citizens or permanent resident aliens, a maximum of 100 shareholders, etc.).
  • IRS Form 2553 is required to start a Subchapter S company. Some states may require additional documentation.
  • S corps can offer significant self-employment tax savings, limited liability, and pass-through taxation.
  • An S corp is not usually taxed at the corporate level. S corps in some states are subject to a franchise tax (e.g. California) or other taxes (New York).
  • Start an S corporation by first starting an LLC
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Start an S corp with Collective and let them handle your monthly accounting, business compliance, and much more.

What Type of Business Structures Can Start an S Corp?

The 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. In addition, your business must meet specific IRS requirements, included below.

S Corp Requirements

  • Have 100 shareholders or less
  • Are domestic LLCs or corporations
  • Issue only one class of stock
  • Shareholders are US citizens or permanent resident aliens
  • Are owned by private individuals

S Corp Tax Benefits a Software Engineer Should Know

S corporations enjoy certain tax benefits, such as pass-through taxation (all losses and profit —  credits, distributions, deductions — pass directly to the owner). In a default LLC, all profits bypass the company and go directly to the owner where the shareholders/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 money they receive after paying business expenses. Self-employment taxes include social security and medicare. 

S Corp Taxes Simplified

Unlike in a default LLC, an LLC with S corp status only pays income tax on the distributions. This is because in an S corp, an owner is considered a salaried employee. As such, the owner/shareholder is only responsible for paying both self-employment taxes and income tax on the salary portion. By only paying income tax on the distributions portion, a business owner can benefit from significant tax savings, which amount to about 15.3%. 

Electing S Corp Status for My Business as a Software Engineer

We generally recommend that a business elects an S corp status after starting an LLC rather than a corporation, since an LLC has less oversight and a corporation would negate some of the S corp benefits. 

In addition, you should consider 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 and the owner's reasonable salary, meaning — what the position normally pays for the job. 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

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Are you a solopreneur looking to start your S corp or convert your existing LLC and start saving on taxes? Find your all-in-one S Corp business solution with Collective.


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 2: Name Your LLC

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.

New York State Form CT-6

Form CT-6 is required for your New York LLC or corporation to be taxed as an S corp after electing an S corp tax status. You can complete and file Form CT-6 with the New York Department of Taxation and Finance. In addition, the state of New York has a publication requirement. Check with your state and local municipalities for any additional requirements.

Steps to Take After Starting an S Corp

Once you formalize your S corp, consider adding a business phone line to protect your personal information with Collective

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.

For business banking check out our guide on the best banks for small businesses.

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Recommended: You’ve worked hard and deserve a break! If you make at least $20,000 in distributions, let Collective start your S corp, so you can focus on your business.


Start an S Corp FAQ

What is an S corp?

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.

Is an S corp an LLC?

No. An S corp is a tax designation that an LLC or a corporation can elect.

How do you form an S corp?

You can form an S corp by filing Form 2553 with the Internal Revenue Service (IRS).

What are the requirements for an S corp?

S corps must meet these requirements:

  • Have 100 shareholders or less
  • Are domestic LLCs or corporations
  • Issue only one class of stock
  • Shareholders are U.S. citizens or permanent resident aliens
  • Are owned by private individuals

What are the benefits of an S corp?

Owners of S corps are considered employees of their company and can save thousands of dollars on self-employment taxes as a result.

Are taxes for LLCs and S corps the same?

No. The default taxes for an LLC and taxes for an S corp are not the same.

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.

What is a reasonable salary for an S corp?

Unlike the default LLC business structure, in which owners must pay self-employment tax on all of the company’s profits, owners of S corps are considered employees of the business and only have to pay self-employment tax on a salary they receive. Any other money they take from the company’s profits in the form of distributions isn’t subject to self-employment tax.

S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.

What is a distribution?

A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.

What is pass-through taxation?

Pass-through taxation is a system of taxation that generally applies to sole proprietorships, partnerships, LLCs, and S corps. In this system, the profits or losses of the business are not taxed at the business level. Instead, they pass through to the owners’ personal tax returns and are taxed at each owners’ personal income tax rate.

What is the S corp tax rate?

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.

Can I still use my DBA name if I elect to be an S corp?

LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.