Last Updated: June 10, 2024, 9:41 am by TRUiC Team


How to Start an S Corp as a Cleaning Service

An S corporation (S corp) is an Internal Revenue Service (IRS) tax classification that may help your cleaning service save money on taxes. Cleaning services are hired to clean and maintain indoor environments for their clients. 

Whether your cleaning service is fairly new or has been around for many years, electing to be taxed as an S corporation can save you thousands of dollars yearly.

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

Masked maid cleaning glass in office.

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 cleaning service 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 cleaning service 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 Cleaning Services Company 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 salary you pay yourself must be considered “reasonable” for the work you do. A good way to judge if the number you pick is reasonable is whether it would be fair to pay someone doing the same work that amount. Online resources like Glassdoor and the US Bureau of Labor Statistics can help you find pay ranges and average salaries for reference.

The average salary for a cleaning service worker in the US is $35,466. Factors like your level of experience and location can affect how much you should be making. For example, workers in cities often make more than people with the same jobs in rural areas due to the higher cost of living in metropolitan areas. Be sure to account for those and other applicable variables when deciding on a salary for yourself.

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 Cleaning Service 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.

Cleaning Service Information

Cleaning services sanitize and maintain buildings and indoor environments for their clients. They are usually hired to clean places like homes, offices, and hotels. Data from February 2022 puts the number of cleaning and janitorial services in the US at over 1 million. 

Services like this are most common in large cities and affluent areas, but businesses having dedicated cleaning services are quite common, making this kind of work desirable just about anywhere.

Why Most Cleaning Services Should Have a Legal Business Entity

Liability is the largest reason a business should have a legal business entity. A legal business entity can protect your employees from lawsuits should your business be sued by a third party. For example, say you run a cleaning service and are hired to clean a client’s home. While cleaning, a bottle of bleach breaks open and stains an antique rug. The clients are suing you over the irreplaceable rug, but they would only be able to sue the business itself. You, as the employee, will not have your personal assets taken away because of the lawsuit.

Is an S Corp Right for My Cleaning Service?

Only you as the business owner can decide whether becoming an S corp will be right for your cleaning service. Compare the following S corp requirements with the long-term goals you have for your business to see whether it would be worth it to tax your cleaning service as an S corp.

To be an S corp, you must run payroll on all of your employees, including yourself. This means that even if you are the only employee, you will still have to run payroll. Cleaning services with multiple employees will probably already run payroll, so they will not have to change anything. But, for those that may not be able to afford the extra accounting costs or that work by themselves, the money saved on taxes as an S corp may not be worth it.

Another requirement is that S corps can have a maximum of 100 shareholders. If you are seeking to grow your financing with more investors, this may be a sticking point for your business. Should 100 shareholders not seem like enough for your plans, you may want to make your business into a C corporation rather than an S corporation.

Lastly, you will need to account for the distribution. S corp owners will need to take a distribution of the business’s profits for themselves in addition to their reasonable salary. You are recommended to take at least $10,000 to receive the full tax benefits of turning your business into an S corp. If you have other uses for the money, such as reinvesting it back into the business, you may want to be taxed as an LLC rather than an S corp.

Cleaning Service S Corporation Examples

Not all cleaning services will benefit from an S corporation. Here are two examples to help illustrate which types of cleaning services should elect S corporation status.

Scenario 1:

First, imagine you run a cleaning service on the outskirts of a small city. Including yourself, there are seven employees with six cleaners and one customer service associate that handles appointment making. Payroll has been run on all of your employees since you first hired them. Your clients consist of several homes in the area as well as a large office building in the downtown area. The number of clients your business maintains has been on a steady upward trend over the last few years and you are making much more than you need to pay your employees and cover the needs of the business. You and your 17 shareholders agree that things are going well and do not need to change much in the foreseeable future.

Should you and your shareholders agree, this would be a good business to become an S corp. You already run payroll and sit below the maximum number of shareholders, so that will not be an issue. So long as you take a distribution and set a reasonable salary, there should be no issue with your business becoming an S corp.

Scenario 2:

Now, imagine that you run a cleaning service by yourself from your home. While small, your business has a group of clients that are very satisfied with your work. You clean for a few homes in your neighborhood and an office on the weekend. There are no other shareholders currently with your business, but you are looking to find some new investors. Going forward, you hope to grow your business but first want to upgrade your equipment and purchase a vehicle more suited to take you and your equipment from job to job than your personal vehicle.

This cleaning service is not currently a good choice to become an S corp. While you are fine in terms of shareholders, you do not run payroll, and the money you spend would take away from your plans to upgrade your equipment and purchase a new vehicle. The same goes for the distribution since it would take away from your reinvestments.

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.

$35,466 is the average US salary for a cleaning service employee, according to Glassdoor. Variables like experience and location are bound to change what your salary should be, so account for those when doing your research.

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, you will count toward your shareholder total. So if you had no other shareholders, your business would have 1, but if you already had 100, you would put yourself over the max.

No, that is the lowest amount you are recommended to take. You can always take more if you’d like, but if you take any less, you will not receive the full tax benefits an S corp can offer.