If you’re a real estate agent, you’re likely self-employed, which means you’re responsible for both sides of the taxes. The self-employment tax is 15.3%, versus the 7.65%, W-2 employees pay with the other half being paid by their boss.
When you are paid as an independent contractor (1099), you are both the employee and the employer, so you must cover both sides of the tax. But there’s one way to help reduce it – file as an S-Corp.
How an S-Corp Helps Lower your Taxes
If you elect to be taxed as an S-Corp, you become an owner/employee of the corporation. You pay yourself a “reasonable” salary (W-2) and as a result only the salary portion of your income will be subject to self-employment taxes aka payroll taxes. You can take rest of the income as distributions which will be shielded from 15.3% of self-employment taxes.
While the strategy sounds simple – it requires meticulous planning. S-Corps have considerably more filing and compliance requirements. Plus, it’s imperative that you know the average income for real estate agents, as service based businesses are rigorously monitored to ensure that the owner’s salary is not too low.
How an S-Corp Works
Here’s an example.
John is a real estate agent and earned $150,000 last year. His taxable income came down to $115,000. As a sole proprietor, he would owe income taxes as well as self-employment taxes on the entire $115,000, so his tax liability will be around $29,000 (using 10% of income tax rate for simplicity).
If John filed as an S-Corp; however, and paid himself $50,000 in salary, then he would owe $7,650 on his salary and $11,500 on rest of his income for a total of $19,000, giving him net savings of ~$10,000.
Final Thoughts
Creating an S-Corp may benefit you, but it’s not for everyone. If you’re wondering if it’s right for you, then let’s chat. We’ll discuss the cost of setting up an S-Corp and compare it to the potential tax savings to see if it’s right for you.