Last Updated: June 10, 2024, 9:39 am by TRUiC Team


How to Start an S Corp as a Web Designer

An S corporation (S corp) is an Internal Revenue Service (IRS) tax classification that may help your web design business save money on its taxes. Web designers create and maintain websites for their clients, ensuring they suit the client’s needs and continue to do so going forward. 

No matter how long your web design business has been open, you could potentially save thousands of dollars each year by electing S corp status.

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

Web designer sitting at computer, looking at sketches.

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 web design 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 web design 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 Web Designers 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.” This means your salary must be 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 averages and pay scales to enable you to make an informed decision about your reasonable salary.

The average salary of a web designer in the United States is $58,994 per year, according to Glassdoor. Factors like experience and where you work can affect this number so make sure to account for these variables before committing to a reasonable salary amount.

Distributions

Unlike 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 Web Developer 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.

Web Design Business Information

Clients hire web designers to create engaging and easy-to-use websites. Web designers also perform regular maintenance on these sites, updating their content and security to ensure they remain as user friendly as possible. 

Because you can do this sort of work just about anywhere, many web designers work from home or remotely. Data on the number of employed and actively working web designers in the United States is inconsistent, but most sources put it at around 180,000.

Why Most Web Design Businesses Should Have a Legal Business Entity

Registering your business as a legal business entity will give it some legitimacy. Because you create websites that’ll represent your potential clients, they’ll want to know they can trust you. Having a formal business structure is a great way to reinforce that you’re a professional.

Legal business entities also protect their owners and employees from liability if a third party files a lawsuit against the business. For example, let’s say you create a website with some digital assets that you didn’t know were under copyright. The owner of those assets threatens to sue you for copyright infringement. If your business is a legal business entity, they can’t sue you as an individual — only the business itself.

Is an S Corp Right for My Web Design Business?

While only you, as the owner, can decide if electing S corp status is right for your business, you must meet several requirements to determine if you can even apply. 

First, you must run payroll for all of your employees. This isn’t an issue for some businesses, but the costs involved with running payroll can prove detrimental to smaller businesses trying to save their money.

Second, your business can’t have more than 100 shareholders. Exceeding this limit would disqualify your business from being taxed as an S corp. Again, this won’t pose an issue for some businesses while others that rely on having a large number of shareholders can’t afford to limit their potential investors. Those businesses likely would be better off as C corps.

The last major requirement is that S corp owners must take a distribution, which is a portion of their business’s net profits that goes directly to them. You’ll need to take a distribution of at least $10,000 to reap the full tax benefits of S corp status — in addition to your reasonable salary. If you’d rather put that money back into your business for upgrades or to support future goals, you may be better off leaving your web design business as an LLC.

Web Designer S Corporation Examples

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

Scenario 1:

Imagine you run a successful web design business for clients across the country. You work from home and enjoy the freedom that gives you. Your clients include several small businesses and even a few small corporations looking to make their digital presence more approachable. While you’re the only employee, you’ve considered paying a local accounting business to run payroll for you to avoid the hassles that come with the accounting end of your business. 

As long as you keep an eye on your total number of shareholders and take a distribution, this business could benefit from the S corp tax designation. Setting up payroll is your only large obstacle, but getting an accounting business to run that for you would put you in good standing to elect S corp status.

Scenario 2:

Now, let’s say you run a web design business for which you’re the only employee and you work from home. But, unlike the previous scenario, you hope to change that in the next five years by securing office space and hiring some employees to work with you. In preparation, you’re taking on more work and stashing the money away so you can hire a few employees and lease an office when the time comes.

This business probably won’t benefit much from becoming an S corp. Because you’re actively saving money, taking a distribution doesn’t make sense. Paying to run payroll now when you don’t have to also likely would be a waste of money. Moreover, you’re not in a position to limit your investors to an S corp’s 100-shareholder maximum.

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.

Web designers earn an average of $58,994 per year in the United States, according to Glassdoor. This number can change, however, depending on your level of experience and location. Remember to factor these variables in before choosing your 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.

You can potentially save a significant amount of money when taxed as an S corp  no matter how much income your business generates. Still, your business should expect to earn $80,000 or more in profits to fully benefit from S corp status.

No. You can keep your original shareholders and add new ones to your business. Just make sure you don’t exceed the limit of 100 shareholders.