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The Real Estate CPA. Hall CPA PLLC, 4441 Six Forks Rd, Suite 106-150, Raleigh NC 27609, (202) 455-8584 NC Firm #: 34357, https://www.therealestatecpa.com/blog/real-estate-agents-tired-paying-large-amounts-self-employment-tax. Accessed 9th Feb. 2021.

If you are a real estate agent or broker, you are most likely subject to the self-employment tax. Read this to discover how you can potentially save thousands on your tax bill by electing to be taxed as an S Corp.

If you’re like many real estate agents and brokers, you are paid as independent contractor (1099) and not an employee (W-2).

As an independent contractor, you are considered self-employed and subject to the full 15.3% self-employment tax. Whereas W-2 employees pay 7.65% and their employer pays the other 7.65%. (I guess it costs to be the boss, right?)

How Can an S Corp Help?

Creating an S Corp, or an LLC taxed as an S Corp, allows you to hire yourself as a W-2 employee and split your earnings between salary and distributions.

In this strategy, you only pay the 15.3% SE tax on the part of your income considered salary, not on the distributions.

It is important to note that the wage or salary you pay yourself must be reasonable, otherwise the IRS might charge you back taxes and penalties (i.e. your wages can’t be $1 and dividends $99,999).

Example

Jane is a real estate broker with earnings of $167,830 for the 2017 tax year. If she were simply a sole proprietor, then all of her income would be considered wages, and up to $118,500 would be subject to the 15.3% SE tax – totaling $18,130.50.

However, if she were to set up an LLC and elect to be taxed as an S Corp, she can split the earnings between salary and distributions. With the help of her CPA, they determine $65,000 to be a reasonable salary. This means that she will only pay the SE tax on $65,000, saving $8,361.

Check out Episode 16 to hear Brandon walk through the S-Corp

Potential Pitfalls of this Strategy

Of course, Uncle Sam wants his money, so it’s never that easy.

Service companies are more likely to be scrutinized by the IRS when using this strategy because most of your earnings come from personal efforts, and not of that of other employees. That is why it is imperative to work with your CPA to research and document the reasons behind the reasonable salary you decide to pay yourself.

The IRS requires companies with W-2 employees to pay Federal Unemployment Tax (FUTA) of 6.20% on the first $7,000 of income for each employee. In some states you could also be subject to the State Unemployment Tax (SUTA). Once you implement this strategy, you will considered a W-2 employee and will have to pay this tax.

Since the S-Corp is a separate entity, a separate tax is required, which comes with additional tax preparation costs.  Also, S Corps have other compliance requirements such as setting up a board of directors and holding meetings.

The Bottom Line

Creating an entity and electing to be taxed as an S Corp has its advantages and can potentially lower your tax liability, but may not be for everyone.

There are costs involved with setting up and maintaining the entity, which will have to be weighed against the actual tax savings you will receive. In many cases this strategy will make sense for higher income earners.

You will want to discuss the advantages and disadvantages this strategy with a qualified tax professional to find out if this makes sense for you.

1200s
Marco Polo
The Italian explorer brought a Chinese kite back to Italy.

1752
An electric moment
Benjamin Franklin used a kite to demonstrate the electrical nature of lighting.

1800s
Kites and science
Kites were used throughout this century for scientific research.

May 29, 2003
The Kite Runner
Author Khaled Hosseini publishes one of the most popular modern novels of current times, The Kite Runner.

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First quarter
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Second quarter
Tom Brady answers back on a 24-yard touchdown pass to Chris Godwin. The Bucs also add another field goal. But the Chiefs are able to keep things close as Mahomes hits Tyreek Hill for a touchdown. The score at halftime has the Chiefs up 14-13.

Third quarter
The Chiefs open up by extending their lead on a huge play, a 63-yard bomb from Mahomes to Hill. Although, Brady is able to respond on a 17-yard touchdown to Mike Evans. The quarterback battle is getting fierce, however, as Mahomes ends the quarter on a touchdown pass to Travis Kelce. The Chiefs lead 27-20 heading into the final quarter.

Fourth quarter
Brady finds Rob Gronkowski on a touchdown to start the quarter, evening things up at 27-27. That remains the score until about six minutes left in the game. That’s when Mahomes turns into a scrambler and runs his way into the end zone for a 12-yard touchdown. The Bucs aren’t able to answer, and the Chiefs add an extra field goal before the game ends.

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KORY WHITE
REALTOR® | INVESTOR / HOME BUYER | COACH
Brokered by Corey Simpson & Associates Realtors®
mobile 469-737-0059
realtor@korywhite.com | calendly.com/korytherealtor

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KORY WHITE
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Brokered by Corey Simpson & Associates Realtors®
mobile 469-737-0059
realtor@korywhite.com | realtor.korywhite.com

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