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If you are a real estate of the realm agent or broke, you are most probably 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 freelancer contractile organ ( 1099 ) and not an employee ( W-2 ) .
As an independent contractor, you are considered freelance and capable to the wax 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 emboss, 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 wage and distributions .
In this scheme, you entirely pay the 15.3 % SE tax on the separate of your income considered wage, not on the distributions .
It is important to note that the engage or wage you pay yourself must be reasonable, differently the IRS might charge you back taxes and penalties ( i.e. your wages can ’ thymine be $ 1 and dividends $ 99,999 ) .
Jane is a veridical estate broker with earnings of $ 167,830 for the 2017 tax class. If she were merely a sole owner, 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 wage and distributions. With the serve of her CPA, they determine $ 65,000 to be a reasonable wage. This means that she will merely pay the SE tax on $ 65,000, saving $ 8,361 .
Check out Episode 16 to hear Brandon walk through the S-Corp
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Potential Pitfalls of this Strategy
Of course, Uncle Sam wants his money, so it ’ second 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 wage 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 gear $ 7,000 of income for each employee. In some states you could besides 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 freestanding tax is required, which comes with extra tax cooking costs. besides, S Corps have early complaisance 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 scheme will make feel for higher income earners.
You will want to discuss the advantages and disadvantages this strategy with a qualify tax master to find out if this makes smell for you .