If you're a real estate agent, make sure you're not missing out on this business structure.
As a self-employed real estate agent, you enjoy a certain amount of freedom and tax breaks, such as deducting your expenses. But if you’re filing as a sole proprietor and have yet to incorporate your real estate business, you’re missing out.
There are certain things that need to happen for your business to become an S-Corp, like proper real estate accounting, but the benefits are worth it. An S-Corp is a pass-through entity, meaning the corporation’s earnings and losses pass through to the owner’s tax return. It offers many benefits for real estate agents who decide to incorporate. Let’s take a look at each one.
An S-Corp is a pass-through entity, meaning the corporation’s earnings and losses pass through to the owner’s tax return. It offers many benefits for real estate agents who decide to incorporate. Let’s take a look at each one.
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Reduce Liability
When you incorporate your real estate business, you create a clear separation between your assets and the assets of your business. The separation will come in handy if you get sued. The lawsuit can only go after assets owned by the S-Corp, not your personal property such as your car, personal bank account, or home.
Better Reputation
Forming an S-Corp gives you more clout as a real estate agent. Clients are more likely to want to work with and trust a business. When you incorporate, you choose a name for your real estate business that reflects the niche you want to work in, such as luxury properties or working with first-time buyers.
Forming an S-Corp doesn’t replace having all the required real estate licenses and credentials your state requires. Think of it as the icing on the cake. It sweetens things and lets clients know you’re the real deal.
Lower Taxes
As a sole proprietor, you take home all your commissions. You then have to pay federal income tax, state and local income tax (if applicable), and self-employment tax on your commissions. The self-employment tax is 15.3% on a sole proprietor’s net earnings.
When you form an S-Corp, you earn the exact amount you did as a sole proprietor, but it’s divided differently. The S-Corp hires you as an employee, paying you a reasonable salary. You also get any business profits on top of your annual salary.
But, you only need to pay self-employment tax on the salary portion of your income after you form an S-Corp.
If you earned $100,000 (net) as a sole proprietor real estate agent, you’d pay 15.3% on the full $100,000 ($15,300). But, after forming an S-Corp, you pay yourself a salary of $50,000 and only pay the 15.3% tax on your salary ($7,650).
In this example, forming an S-Corp halves your self-employment tax liability.
Wondering how much you could save? Try our tax calculator.
Better Benefits
As a sole proprietor real estate agent, you don’t get access to the benefits employees do, like employer-sponsored healthcare plans, flexible spending accounts (FSA) and retirement accounts. That all changes when you incorporate.
An S-Corp for a real estate agents gives more retirement planning options, such as access to a solo 401(k) plan. You can contribute more annually to a 401(k) than a traditional or Roth IRA, up to $20,500. You also get to contribute a match from the business profits.
Reduce Audit Risk
No one wants to be audited, which is why incorporating makes sense for real estate agents. An appropriately managed S-Corp is 10 times less likely to be audited than a sole proprietor.
The reason is simple: The IRS tends to go after high earners. When you’re a sole proprietor, your income is likely higher than the average individual’s. But when you form an S-Corp, you’re likely running a real estate business that’s smaller than the average corporation. The IRS is more likely to audit bigger companies since there’s a greater reward if the audit turns up any concerns.
PredictableIncome
Your commissions can fluctuate considerably as a real estate agent. One month, you bring in $10,000. Then next, you earn just $1,000. That makes it tough to budget and plan.
When you form an S-Corp, you pick a salary and a compensation timeline, such as monthly or quarterly. Your income becomes predictable and steady, making it easier to budget and set personal financial goals.
Formations Can Help
Incorporating your real estate business saves you money, gives you access to better benefits, and can help you grow your business. If you’re ready to take your business to the next level, Formations can help.
We streamline S-Corp management for real estate agents, saving you thousands on taxes annually while giving you the visibility and insights you need to grow your business and protect your future.
Schedule a complimentary, 15-minute consultation with a financial expert to learn more.
