As a real estate agent, the tax structure you choose can have major implications on how much you pay. But which one works best for you?
S-Corporations for Real Estate Agents
An S-Corporation (S-Corp) is a filing designation with the IRS. There’s often confusion between LLCs and S-Corps—an LLC is a legal business structure, while an S-Corp is a tax classification elected with a form you submit to the IRS.
S-Corps offer significant tax benefits and lessen your self-employment taxes owed at the end of the year. You get access to better benefits, legal protection of your assets, and credibility in your industry. But to make the most of these perks, there is ongoing maintenance and management of your business that you'll have to take on or outsource.
The incorporation and complex compliance rules require time and money for setup and ongoing management of the business. You'll need excellent bookkeeping practices and a way to issue payroll for yourself, but these changes are more than just restructuring your business—they're a shift in mindset.
Good bookkeeping and a proactive approach to managing your business finances will give you better visibility into the financial health of your business, more predictability, allow for better decision-making, and provide peace of mind.
How S-Corps Work
The easiest way to think of running an S-Corp as a self-employed professional is to imagine yourself wearing two hats: one as an employee and another as an owner.
The Employee
You will receive a salary as if you were W2.
You'll have a business expense reimbursem*nt policy to be repaid by the business (to ensure you maximize expenses).
If you primarily work from home, you'll be able to take advantage of the Business Use of Home deductions.
You may deduct business miles driven at the yearly IRS mileage rate and reimburse yourself as an employee for those incurred costs.
Contribute to a retirement plan such as a Solo 401(k).
The Owner
You can withdraw funds directly from your business account at any time as equity distributions (which are non-taxable in most cases).
Your personal assets will be protected if there is a lawsuit against your company.
You can set up retirement plans for yourself and your employees (that's right, you can double your savings with your own corporate matching).
S-Corp Requirements
Tax Filing Requirements for S-Corps
Although exempt from corporate taxes, S-Corps must file business tax returns and report their earnings to the government. Form 1120-S (reports on income, losses, dividends, and other distributions) is used for S-Corp tax filings and is frequently accompanied by a Schedule K-1.
S-Corps are also obligated to file Form 941 quarterly for their payroll tax obligations.
Business Banking for S-Corps
One of the compliance requirements to be an S-Corp is treating your business and personal finances as two separate entities, so you'll need to open a business bank account and adapt some better bookkeeping practices.
Getting a system in place for your back office will ensure you have clean books and help you keep more of what you earn. Solutions like Formations integrate accounting software for real estate agents—powered by Xero —to help track performance, manage expenses, and get more visibility. Then it can be paired with real-time guidance and expertise from tax professionals throughout the year so you can make more informed decisions on your business.
Running Payroll
As an S-Corp, the IRS will want to see that you're paying yourself wages via payroll (see reasonable compensation below).
You can have the net check deposited directly into your personal bank account or write a check manually.
All necessary payroll filings (state or federal) are due quarterly and yearly.
What's running payroll?
Part of the requirements to run an S-Corp include paying yourself a reasonable salary. The salary, or reasonable compensation, is what would ordinarily be paid for comparable services by enterprises under similar circ*mstances. Engaging a financial advisor before issuing payroll is essential to ensure you pay yourself the appropriate reasonable compensation. However, it's important to note that payroll plans are flexible. You can adjust your payroll plan depending on your goals and cash flow needs. Find more information about reasonable compensation here.
The Pros and Cons of S-Corp
The Advantages of S-Corp
The S-Corp structure significantly reduces self-employment tax liability. S-Corp status can lower the personal income tax for business owners because a self-employed individual becomes both the owner and employee of their own business. By becoming an employee of their own company, they receive a regular paycheck like their W2 peers. They also receive the business' profits creating steady, predictable pay while reducing their self-employment tax liability.
S-Corp stakeholders (owners) can be company employees who earn a salary and receive tax-free corporate dividends (so long as distribution does not exceed their stock basis).
Other advantages include transferring interest or adjusting property basis without facing adverse tax consequences (or complying with complex accounting rules).
S-Corp status establishes credibility amongst clients, peers, suppliers, partners and more, by showing the owner's official commitment to the company.
By becoming an S-Corp, self-employed individuals can access corporate-level benefits such as more options for healthcare and retirement savings.
Disadvantages of S-Corp
The IRS pays close attenttion to how S-Corps pay their employees. Employees must receive easonable compensation before any diisttributions are made on profits.
Distributions are based on the percentage of ownership or number of shares that each owner holds.By becoming an S-Corp, self-employed individuals can access corporate-level benefits such as more options for healthcare and retirement savings.
Setting up an S-Corp can take time and money. The corporation must have a registered agent for the business and pay fees associated with incorporating (done with the Secretary of State where the company is based).
Additional Perks of an S-Corp
Health Insurance for Self-Employed
By paying for health insurance through the company as an employee, you can deduct the cost of premiums as a business expense. As a shareholder of the company, it will show up as income on your W2, but the tax savings remain because you will have prepaid the necessary taxes through payroll.
Retirement Saving for Self-Employed
You truly realize the benefits of an S-Corp when exploring Solo 401(k) and SEP IRA retirement plans. When opened under the company, these plans will enable you to contribute a portion of your W2 salary to your retirement plan AND allow the company to match those contributions as a business expense. This takes income you would typically pay self-employment taxes on and puts it in a tax-deferred retirement account.
Questions?
The tax code is overwhelming, and not exactly easy to navigate. Nobody is born knowing how to run a business, and it takes time to understand what's right for you. But asking questions is the best first step.
Connect with one of the Business Consultants at Formations for a complimentary consultation to review your business strategy and the next best steps.
Learn more about Xero for real estate
Disclaimer: This is a guest article written by a third party. The information contained in this article represents the views and opinions of the author and does not necessarily represent the views and opinions of Xero.
The information provided does not constitute legal or tax advice. All information, content, and materials are for informational purposes only. Before making any decisions consult your attorney or tax advisor.
