Last Updated: June 10, 2024, 9:38 am by TRUiC Team


How to Start an S Corp as a Solopreneur

An S corporation (S corp) is an Internal Revenue Service (IRS) tax classification that may help your solopreneur business save money on its taxes. A solopreneur — or a solo entrepreneur — is someone who runs a business entirely by themselves with no other employees or partners. Solopreneurs can operate any kind of business with their own abilities as the only restriction. 

Regardless of how long you’ve run your business, electing S corp status can potentially save you thousands of dollars each year on taxes.

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

Woman solopreneur smiling.

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 solopreneur 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 solopreneur 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 Solopreneurs 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 requires S corp owners to pay themselves a “reasonable” salary — the equivalent to what someone else doing the same work would earn. If you need help finding a reasonable salary for what you do, online resources like Glassdoor and the US Bureau of Labor Statistics provide pay averages and ranges so you can determine the figure that’ll work best for you.

Because a solopreneur can run just about any kind of business or company, you may find it quite difficult to choose a reasonable salary. With a pay range of $16,920 to $92,110, the average salary of a solopreneur in the United States is $36,200. 

Of course, this figure can vary wildly based on what your business does so remember to research what someone with your position earns on a resource like Glassdoor. Moreover, experience and location can affect your salary so consider those variables when conducting your research.

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 Solopreneur 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 LLC’s 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.

Solopreneur Business Information

Solopreneurs are daring individuals who create and operate businesses on their own. They can run anything from online stores to accounting firms as long as they have the skills and drive to keep going. 

Since the COVID-19 pandemic hit the United States, the ranks of solopreneurs have grown with an estimated 40 million US citizens working as a solopreneur for a business or service. You can find this type of business everywhere — especially with the rise of remote work.

Why Most Solopreneur Businesses Should Have a Legal Business Entity

The key reason why a solopreneur business would want to be a legal business entity is that it’ll protect you, as the only employee, from liability if a third party ever sues your business. 

For example, let’s say you run a solo accounting business and miscalculate some information for a client. That client now faces an IRS audit and sues you over the matter. The lawsuit can’t target you as an individual — just your business. This means that if a court finds you in the wrong, it can only take your business’s assets as compensation and not your personal assets.

Another benefit of registering your business as a legal business entity is that it’ll give it more legitimacy. Clients are more likely to hire a business with a legal business structure because it helps them stand out and seem more professional.

Is an S Corp Right for My Solopreneur Business?

Ultimately, this’ll depend on your long-term goals and what you think is right for your business. As the owner, only you can decide if electing S corp status will prove advantageous given the requirements associated with this tax designation. 

For example, the IRS requires an S corp to run payroll for all of its employees. While that’s usually not a problem for businesses with multiple employees, it can be a costly hurdle for those with just one like solopreneur businesses. Running payroll can be expensive and may not make the money you’d save on your business’s taxes go as far.

S corp owners also must take a distribution of their company’s profits in addition to their reasonable salary. You’ll need to take at least $10,000 as a distribution in order to receive the maximum tax benefits of electing S corp status. Because solopreneurs only have to pay themselves, they’re more likely to have extra money left over from their profits. Yet, $10,000 can seem like a lot of money to a small business — especially when it could help fund upgrades to the business. If you’d rather put any extra money back into your business, you’d likely be better off as an LLC. 

On the other hand, you won’t have to worry about the requirement that limits S corp shareholders to a maximum of 100. With solo in the name, solopreneurs don’t report to anyone else — including shareholders. As a solopreneur, you won’t have any shareholders so you’ll always remain below this limit.

Solopreneur S Corporation Examples

Not all solopreneur businesses will benefit from electing S corp status. Here are two examples to help illustrate which types may find the S corp tax designation advantageous.

Scenario 1:

Imagine you run a web design business by yourself. You work a regular office job during the week and handle the majority of your web design work in the evenings and on weekends. It’s a very profitable side job and you only take on work when you want to make some extra money or feel like doing the extra work. You have very little overhead because you can do all of your work from your personal laptop. While your business started small with local businesses, a few larger companies recently contacted you to do work that resulted in you making dependable money from those projects.

This business is an ideal candidate for electing S corp status. You’ll have no shareholders as a solopreneur and, as long as you make enough money to take a $10,000 distribution in addition to a reasonable salary, you’ll meet the distribution requirement. The only concern is running payroll, but you should be able to pay for that as well.

Scenario 2:

Now, let’s say you run a solo plumbing business. You went through trade school and are quite confident in your skills. Currently, you work out of your house and use your personal vehicle to go from job to job. With many local businesses as loyal clients that call you at least once a month, you’ve been able to make a good living from these relationships in your town. 

You do, however, want to make your business seem a little bit more legitimate. Items like a larger, more expansive tool kit, some specialized tools, and a new truck to store and transport these items would help your jobs go more smoothly and make you seem like a more professional business. 

S corp status likely won’t suit this business right now. While you won’t have to worry about shareholders, the additional costs of running payroll and taking a distribution would reduce the amount you could reinvest in your business. That’ll limit the upgraded items you could purchase.

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.

Because solopreneurs can operate a large variety of businesses, there’s no set salary on which to base estimations. Data collected in late 2022 shows the average salary of a solopreneur in the United States as $36,200. However, this figure can wildly change based on your profession and location. Make sure to research what someone in your field — and at your level of experience — earns before committing to a reasonable salary.

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.

No. Your title will remain the same as it was when you formed your business. Becoming an S corp won’t change this.

No. You won’t lose S corp status as long as your business still meets the other criteria. The simple act of hiring employees won’t change much as long as you run payroll.