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


How to Start an S Corp as a Web Developer

An S corporation (S corp) is an Internal Revenue Service (IRS) tax classification that may help your web development business save money on its taxes. Web developers work to create websites and web applications that serve the purposes set by their clients. 

No matter how many years of web development experience you have, you could potentially save thousands of dollars a 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 developer checking code.

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 development 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 development 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 Developers 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 it must be similar to what someone else would earn for doing the same work. You can use online resources like Glassdoor and the US Bureau of Labor Statistics to see what’s considered fair pay for your work to inform your reasonable salary.

According to Glassdoor, the average pay for a web developer in the United States is $77,497 per year. This salary level can vary, though, based on an individual’s experience and location. The more experience you have, the more likely you are to earn a higher salary. Living in a city or more populous area also can lead to a higher salary given the higher overall cost of living in those areas vs. rural locations. Keep this in mind when determining your reasonable salary.

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 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 Development Business Information

Web developers are programmers who assist in the creation of websites and applications people access and use via web browsers. Companies often hire them to build their professional websites as well as the tools used by their clients through those websites. 

Web developers can perform their work remotely from just about anywhere with a strong enough internet connection, but some prefer to work in regions with a lot of technological industries. While some do this work for fun or in their spare time, the United States had nearly 450,000 actively employed web developers as of September 2022.

Why Most Web Development Businesses Should Have a Legal Business Entity

The main reason you should register your web development business as a legal business entity is that doing so will provide a layer of liability protection between your employees and the business should a third party take legal action against you. 

For example, let’s say a website you help to develop has a security gap that hackers use to steal passwords from your client’s customers. If your client threatens to sue you, they could only sue your business — not you as an individual — when your company is a legal business entity.

Legal business entities also benefit from enhanced legitimacy. A formal business structure can help reassure potential clients that you offer professional services, which has the potential to boost your sales.

Is an S Corp Right for My Web Development Business?

When deciding if you should elect S corp status for your company, consider your long-term business goals. The IRS requires S corps to run payroll for all employees, including their owner(s). This probably won’t deter web development businesses with many employees because they likely run payroll already. But, the cost of running payroll may not be worth it for a small business with just one employee when compared to the money it could save when taxed as an S corp.

You also should consider how you want to handle shareholders for your business. While plenty of businesses operate with just a few shareholders or investors, others seek a larger pool of investors to diversify their sources of funding. Per the IRS, S corps may have a maximum of 100 shareholders. This may not present an issue for your business, but you may want to transition your business into a C corp if it does.

Lastly, you need to consider the IRS’s requirement that S corp owners take an annual distribution of their company’s profits in addition to their reasonable salary. This won’t be an issue for some web developers while others may prefer to reinvest their net profits back into their business to upgrade equipment or make other enhancements. Moreover, you’ll need to take a distribution of at least $10,000 to benefit from the tax savings offered by S corp status.

Web Developer S Corporation Examples

Not every web developer will benefit from electing S corp status for their business. Below are two examples that showcase a business that could benefit from being an S corp and one that won’t.

Scenario 1:

Imagine you run a web development business with three other developers. While you currently work from your homes, you just signed a lease and will move into your new office in a month. You’re interviewing receptionists for the new office who can handle the front end of the business while you and the other developers code and finish projects. Given the extra money you made this year, you recently contacted a local accounting firm to assist with running payroll. 

This business is an excellent candidate for S corp status. Because you’re already setting up payroll, you’d only have to keep your shareholders under 100, pick your reasonable salary, and take your distribution.

Scenario 2:

At the other end of the spectrum, imagine you’re running a small web development business in the middle of restructuring. You’re the only employee right now, but you aim to grow your business in the future. You dream about an office and staff, but need to conserve money for now. 

After finishing a project for a local business, the client expressed interest in investing in your business and mentioned they have some other associates who’re equally interested. In addition, the equipment you purchased to get started is starting to break down so a new computer and some monitors could go a long way to boosting your productivity. 

This is the kind of business that likely would benefit from staying as an LLC. Running payroll would be costly for just yourself and gaining shareholders may be a priority. Moreover, the money you’d have to take as a distribution would be better spent on upgrading your equipment.

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.

The average salary for a web developer in the United States is $77,497 per year. This can vary, however, depending on your location and level of experience. Remember to account for those variables when trying to decide on a salary that’ll work best for you and your position.

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. However, you do need to consider how much money you plan to take for yourself compared to how much needs to go back into your business to keep it operational. Most S corp owners follow a 60/40 split for their total income with 60% coming from their reasonable salary and the other 40% coming from their distribution.

That is something you and your shareholders must discuss before filing the paperwork to elect S corp status. Ultimately, only one distribution needs to be given out to retain S corp status. You could give a distribution to all owners or one can take a distribution while the others simply take higher overall salaries.