Real estate agents can possibly achieve tax savings by electing to be taxed as a Subchapter S Corporation under the Internal Revenue code. A Subchapter S Corporation generally does not pay income tax. The earnings flow through to your personal income tax return.
This is most viable for realtors earning more than $400,000 in gross commission income BUT check with your accountant or tax advisor for their advice.
If you are already an LLC, simply file a Form 2553 within 75 days of the beginning of the year (March 15th for most of us), and you will have been deemed by IRS to have elected to be taxed as a corporation and further elected to be taxed as a Subchapter S Corporation. If you’re not currently practicing as an LLC, in most states you can file a charter online, pay a nominal fee ($50-$75 for most states) and get your certificate online.
The earnings from a Subchapter S Corporation are not considered earned income and are not subject to the self-employment tax, which is where the potential tax savings come in. (Read more)
You will have to pay yourself a small salary or the IRS will make you pay self-employment tax on a fair percentage of the profits anyway. But if you pay the salary in December of each year, any withholding you take out of your paycheck is deemed to have been paid ratably throughout the year and can be a big help with estimated taxes.
Here’s an example of how it would work.
Your (the realtor) net income after marketing and operating costs is $375,000. You then pay a salary to yourself of $75,000 and withhold taxes in December of 2021. You pay Social Security and Medicare taxes on the salary. The remaining $300,000 would flow through to your personal tax return and only ordinary income taxes would be imposed. You pay 15.3 percent of the salary portion or $11,475.
Without the Subchapter S Corporation structure, you would have the entire $375,000 reported on Schedule C and would be subject to self-employment tax on the entire $375,000 or $27,118.
The Subchapter S Corporation structure, in this case, would save $15,643.
LLC Tax = $27,118. S Corp Tax = $11,475. Savings = $15,643.
The savings increases as the income increases. For the most successful agents, who make over one million per year, there is another benefit. Per IRS audit statistics, the IRS audits around 3.2 percent of tax returns of individuals who file a Schedule C with over a million dollars of gross income. The audit rate for Subchapter S Corporations is 0.44 percent.
This may not be for you, but it’s worth asking your tax advisor, or me about.