I have been doing this for a year with a Linode small instance and it works like a charm - although I only use it through a Putty terminal.
I had initially set it up to code small ruby scripts remotely that help me with my day job (mostly to scrape websites with the excellent Scrapi gem). Since IT would not let anyone install anything on their computers, but still left port 443 wide open, I gave it a try.
The added benefit is that working on a linux box through Putty forces you to learn a real terminal text editor - in my case Emacs. I guess I can thank IT now ;)
I've been using my linode box now for about a year and a half as my primary development machine. The reason here is twofold: I can access the machine from anywhere, and I have much better bandwidth on the machine than I'd get from where I currently live. That last bit is key - I live in Hawaii and the internet speeds here leave much to be desired (which is expected for an island in the middle of the pacific). If I need the latest build of ruby, it's not a 20 minute download, it's a 20 second one.
I do all of my work over ssh now. Key based auth allows me to hop in and out as needed, and more importantly it allows me to use libnotify + growl to alert me when things happen on my server. Code finished compiling? Growl pop up to let me know. Message via irssi? Pop up. Makes things feel very seamless. I use git to sync things as needed, vim for development, screen as my multiplexer, and irssi+bitlbee for messaging. It's lovely.
Note, if you like Windows, you can create an instance that runs Windows and log in with RDP. This is particularly nice because it's dead easy to install and configure an RDP client on Linux, Windows or MacOS... Whereas getting an X-Windows installation working perfectly on a non-Unix machine is a lot of work.
I'm pretty amazed that it took Microsoft about two years to realize how much fun it is to use Windows/RDP in the cloud and they still haven't quite added this to Azure. A lot of what I like about AWS is that you can do an awful lot of things the way you're used to doing them.
That said, I mainly use Linux instances, and normally work with an ssh text console from Linux, Windows and MacOS clients. I use jedit on the client machine to edit files through sftp. Some of my instances are production instances that run 24-7, although I commission development machines and machines to run big batch jobs from time to time.
This is how I've been working on my side project. Not with EC2 or Linode, but with a Chunkhost (they're running a beta of very small, 20gb disk / 512mb ram) VPS. Using my Cr48 to develop it has been a dream (minus some minor issues with Cr48's tendency to lock up ssh terms if you lose connection, requiring a reboot to get them out of your alt-tab queue).
It's pretty great - not only can I work on it from anywhere with a working ssh client, but I get super fast speeds.
I've had a Linode for 3 years and love it, too. I spend about $240/year for a node with 512 MB of memory. But EC2 is more economical, providing 3x the memory for nearly the same price, plus much more CPU power and great disk IO performance.
I'm not sure EC2 is more economical in terms of CPU power, as I think Linode gives you access to up to 4 Xeon cores depending on load (which is generally quite low) so you probably get more raw performance from a Linode instance despite having less memory.
Just try to compile Ruby from source on an EC2 Micro instance vs. a $20/month Linode. In my experience (repeated builds at various times of day) the EC2 instance is an order of magnitude slower. And the Linode includes some bandwith, as someone else already mentioned.
I actually switched to using an EC2 Micro instance because my 256MB VPS didn't have enough RAM to compile some of the packages I needed. The compile took a while, but they were for libraries I rebuild maybe once a month.
As far as development goes I haven't had a problem yet with speed. I tend to do small incremental compiles, and when I need to a full compile I go get a cup of coffee.
Just to clarify, the $20/month Linode I'm referring to has 512MB ram.
I'm just using compiling as an illustration of CPU performance. You'll have the same problem when running unit tests, for example. You can only spend so much time on forced coffee breaks before it gets old. Or you can have a very tiny test suite.
I had initially set it up to code small ruby scripts remotely that help me with my day job (mostly to scrape websites with the excellent Scrapi gem). Since IT would not let anyone install anything on their computers, but still left port 443 wide open, I gave it a try.
The added benefit is that working on a linux box through Putty forces you to learn a real terminal text editor - in my case Emacs. I guess I can thank IT now ;)