As real estate agents, maximizing your income isn’t just about closing more deals—it’s also about smart financial management, particularly when it comes to taxes. One strategic approach that many successful realtors utilize is forming an S-Corporation to save significantly on taxes. If you’re making over $75,000 a year, this could be a game changer for your finances.

Quick disclaimer before you read any further – I am neither a CPA nor an attorney, so be sure to consult with one before you take action on this post!

Understanding Self-Employment Tax

As independent contractors, realtors typically receive payment as 1099 income, which is subject to a 15.3% self-employment tax covering Social Security and Medicare. This tax is collected before your regular income tax. The self-employment tax rate is composed of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

The S-Corp Advantage

The beauty of an S-Corp lies in how it allows you to categorize your income. When you form an S-Corp, you can pay yourself a reasonable salary for the work you do, which is subject to normal employment tax. Any income you earn above that salary can be distributed to you as a dividend, which is exempt from the 15.3% self-employment tax. This strategy can lead to substantial tax savings.

How It Works

1. Forming an S-Corp: First, you’ll need to form an LLC and then elect to be treated as an S-Corp with the IRS. This election changes how you are taxed but doesn’t affect your legal protections.
2. Paying Yourself a Salary: As an S-Corp, you must pay yourself a reasonable salary for your job. The IRS scrutinizes these salaries, so it must be commensurate with industry standards and the amount of work you’re doing.
3. Taking Distributions: After paying yourself a salary, any additional profits can be taken as distributions. These distributions are not subject to the self-employment tax, saving you 15.3% on that income.

Considerations

• What is a Reasonable Salary? The definition of “reasonable” can vary, but essentially, it should be what you would pay someone else to do your job. If you’re heavily involved in high-value transactions or managing a large volume of sales, your salary should reflect the higher end of what real estate professionals earn in your area.
• Compliance and Paperwork: Operating as an S-Corp involves more paperwork and compliance than a sole proprietorship, including payroll filings and additional tax forms. You will need to set up a payroll system to handle your salary and withhold the correct taxes.
• Consult a Professional: It’s crucial to consult with a CPA or a tax advisor who specializes in real estate or small business taxes. They can provide personalized advice and ensure that you’re setting up everything correctly to take full advantage of the tax benefits without running afoul of the IRS.

The Bottom Line

The decision to convert to an S-Corp should not be taken lightly, as it involves careful consideration of your business structure, income levels, and personal financial goals. However, with the potential to save 15.3% on part of your income, it’s an option worth exploring, especially as you scale your real estate business. This strategic move can significantly increase the amount of money you keep, making it a powerful tool for building wealth and securing your financial future in real estate.