Real estate professionals will file their taxes as sole props by default unless they take action. While some real estate agents believe that by setting up an LLC (limited liability company) they can improve their tax situation — they are wrong! An LLC is basically what it sounds like; it’s a company set up by an individual or group to limit their personal liabilities in the business so they can operate it as a separate entity from their personal finances. The advantage of this type of filing entity exists mostly on the legal side as it protects (in a limited way) your personal finances from being affected by anything going on in your business, while also still leaving in place the ability to just draw money when you need it from the company. The limits of the LLC structure are that in a tax-paying sense, it really doesn’t create much in the way of benefits. An LLC is a “pass-through” entity, meaning the income from the business passes through the LLC and lands on your personal return. The LLC won’t really do much to blunt the tax impacts for you from the business. As a sole prop, or an LLC — you will pay 15.3% of self-employment taxes on your entire net income, on top of your other federal and state taxes.
An S-corporation is a filing designation from the IRS that allows an LLC to “elect” to be treated as a corporation. It leaves in place the same flexibility and easy management of the LLC but also allows/requires the business to treat itself as a more corporate type of entity. Some of these requirements include filing a separate return (1120S) from the personal return and paying yourself as the “shareholder” of the company as W2 salary that includes a reasonable compensation based on your industry, net income for the business, and what your services would fetch on the open market with another company. The great thing about S-Corps is you can retain independence and flexibility that you would enjoy as a simple LLC while also leveraging compensation and benefits that normally would be unavailable as a sole proprietor with an LLC. You will only pay the 15.3% self-employment taxes on your W2 portion, while the remaining of your income is Self-Employment tax free — and that leads to thousands of dollars in tax savings! You can also get access to 401k account and health insurance premiums that are normally deductible in a large company but wouldn’t be offered to smaller LLCs with no payroll or corporate status. In the same way it’s smart to consider using Tongo as your business card to simplify tax record-keeping, it’s smart to look at the tax implications of how your business is established on the whole.
Regulations and Compliance
Each state will have different regulations and guidelines, determining if real estate professionals are allowed to receive their commissions through an entity or not. While in most states this is possible with the rights steps taken, some states will only allow real estate brokers. It’s important to consult an expert to make sure you avoid mistakes and losing compliance.
Formations, a FinTech startup, offers full-time real estate agents a complete financial management solution to maximize the financial potential of their business and improve their financial wellbeing. Formations will incorporate your LLC, automate the creation of your S-Corp, manage your ongoing finances and file your taxes report.
With Formations, real estate agents can improve their financial stability (and save thousands of dollars on taxes), get real-time insights and recommendations on financial decisions, connect live with a certified bookkeeper and CPA, and gain access to Fortune 500-level benefits like health insurance and 401K.
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Submit this form to request a free consultation with one of Formations experts. In this consultation, a business consultant will review your specific situation and provide their recommendation whether the S Corp is the right solution for you or not. Don’t forget to mention Tongo as your referrer to get a 10% discount on the first year, a special offer for Tongo users.
The blog was written by Shahar Plinner, Formations CEO and Co-Founder.
Shahar is a Tax Guru and entrepreneur with over 15 years of experience in the field. He is an advocate to the self-employed and helps them stop the overpayment of taxes and keep their hard-earned money for better consumption, investment and retirement. Shahar has managed thousands of clients, tax returns, business structures and S-Corps, and before he founded Formations, he built a successful tax accounting practice in Seattle, serving over 3,500 customers.