Are you a full-time Realtor planning to make $80,000 or more this year? Then it’s time to hunker down and get real about your tax-saving strategies because there’s some serious money to be saved.
Are you kinda excited to learn about taxes? Well get ready because we’re showing you how you can save $5,000 or more in taxes this year, and every year after.
What’s the secret sauce? Form an S Corp. Sound too good to be true? It isn’t.....I promise.
Sole proprietors get hammered with income taxes:
Fact: the vast majority of realtors—we’re talking over 80%—are classified as sole proprietors.
Basically, you automatically become a sole proprietor if you start a one-owner business and you don’t form a business entity, such as a limited liability company (LLC) or corporation. And because sole proprietorships are easy and cheap to run, they’re popular with the freelance folk..
Here’s how taxes work when you’re a sole proprietor:
You and your business are considered one and the same for tax purposes
You don’t pay taxes or file tax returns separately for your sole proprietorship
You report any income you earn, and losses you incur, on your personal tax return (IRS Form 1040)
If you earn a profit from your business, you add that money to any other income that you’ve earned, such as interest income or your spouse’s income if you’re married and filing jointly
If you incur a loss, you can use it to offset income from other sources
Once you add up all of your earnings from all sources, that becomes the total that’s taxed at your personal tax rate
Straightforward enough, right? It’s clear that, when it comes to income taxes, being a sole proprietor isn’t bad. The problem, though, is that income taxes are only part of the story.
You also have to pay self-employment taxes on your net self-employment earnings, which consist of two separate taxes: Social Security tax and Medicare tax (the same Social Security and Medicare taxes that employees and employers pay).
Let’s break it all down:
1. Social Security tax is 12.4% (up to an annual income ceiling). Net self-employment earnings (or employee wage income) over the ceiling aren’t subject to the tax.
What’s the ceiling for 2023? It’s around $160K. So, if you earn exactly $160K, you’ll pay $19,840 in Social Security tax. If you earn more than $160K you’ll still pay $19840. If you earn less than $160K, you’ll pay less than $19840. But $19840 is the maximum you must pay, no matter how big your income. Do you want to pay a ton of money into a system that MAY not be there for you when your retired and need that money??
2. Medicare tax is 2.9% up to an annual ceiling, which is $200,000 for single taxpayers and $250,000 for married couples filing jointly.
Anyone who earns more must pay 3.8% tax on income that exceeds the ceiling—in other words, that income will be subject to an additional 0.9% Medicare tax.
3. The combined Social Security and Medicare tax is 15.3%. Thanks to certain deductions, though, the “effective” tax rate is a bit lower.
So, what do we mean when we say that sole proprietors get slammed by the tax law?
Well, a lot of realtors pay more Social Security and Medicare taxes than they do income tax. Plus, they must pay all of those taxes themselves, unlike employees who only have to pay half of those taxes because their employers cover the other half.
To put things in perspective, employees only pay a maximum of 7.65% in Social Security and Medicare tax, while realtors pay 15.3%.
Kinda a downer, isn’t it? Basically, the privilege of working as a sole proprietor comes with some serious tax burdens.
With an LLC that gets taxed as an S-Corporation you will become an employee of your LLC. Then you can control how much wages will be subject to FICA and Medicare. The pay has to be considered reasonable compensation. Now that your an employee, your LLC reimuburses you for your out-of-pocket expenses...such as mileage, and home office, travel, etc...AND GUESS WHAT...those reimbursements are NOT taxable to the you the employee, and the LLC gets to write it off. Then what ever the profit is you can take as distributions for your ownership of the business. Distributions are like dividends for your ownership...investment... of the asset/business. They are not subject to FICA and Medicare. There are many other ways to save with the S-corporation model. Too many for me to list. But if you decide to pursue it here is how you do it:
The majority of Real Estate Licensees in Florida are independent contractors and one of the important consequences of this model is that the licensees are responsible for paying their own taxes to the IRS. One of the requirements under Internal Revenue code is that there must be a written agreement between the Broker and Associate with the verbiage affirming this business arrangement. The IRS has specific guidelines to determine how to qualify as an independent contractor.Florida license law allows sales associates and broker associates to incorporate as individual licensees for the tax benefits and personal risk reduction. This can afford tremendous tax savings and protect personal assets.
The Florida Statute allows a licensees to choose:
Professional Corporation (PA) Limited Liability Company (LLC) Professional Limited Liability Company (PLLC)
We prefer the simplicity of the single member LLC. You don't have as many rules to follow as a corporation has. Harder for a greedy lawyer to pierce the LLC viel than a corporate veil. We would simply ask the IRS to allow the LLC to be taxed as an S-Corporation...you get the best of both worlds. Florida licensing law requires that each licensee be issued a license in their legal name, if properly qualified the legal entity designation may be added to the license. No trade names allowed. You should seek the advise of their Accountant in deciding which corporate structure works best for their situation. In order to ensure that the process is done correctly, the licensee’s attorney or accountant can set everything up for a fee. Step One: Corporation or LLC created through the Florida Department of State’s Division of Corporations website. Step Two: Articles of Incorporation have been created Step Three: Create a federal tax identification number on the Internal Revenue Service website. Step Four: The licensee is now ready to have the licensee reissued by the Florida Department of Business and Professional Regulation in the name of the corporate entity, which must be the legal name with the proper entity designation (Ceiliah Epner, PA). Step Five: IRS W-9 form is created and the process is now complete from a legal standpoint. Step Six: Create a business bank account. The bank will require the Articles of Incorporation and IRS tax identification number in order to open the account and request a credit or debit card strictly for business purposes. Now that the licensee is a business entity, business cards, signs and advertising are required to reflect the new corporate name. The brokerage will be paying the corporation, and the corporation will be the employer of the individual. There are filing of quarterly taxes.
Contact us for more information. We will be happy to meet with you after tax season. We do bill only $99 for a business consultation. The costs to run an S-Corporation can range $1000-$1500 annually with tax preparation and payroll fees, but the savings could be $10,000 or more annually. Take that annual savings of 10K and put it into a retirement account. In thirty years when you have a million dollars in that retirement account you can thank me then.