How Realtors Get Taxed

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How Realtors Get Taxed

Leland Gross CFP® EA | June 5, 2024

How Realtors Get Taxed: Navigating Self-Employment and S Corporation Structures

As a realtor, understanding the nuances of taxation is crucial for maximizing your earnings and minimizing liabilities. Realtors generally fall into two primary tax categories: Schedule C self-employed and S Corporation. Each has distinct advantages and considerations, so let's delve into these structures to help you make informed decisions tailored to your unique circumstances.

Schedule C Self-Employed

Realtors often operate as self-employed individuals, reporting income and expenses on Schedule C of their personal tax returns. Here are the key points:

Single Income Stream: All business income is reported on Schedule C. This includes commissions, fees, and any other business-related income.

Self-Employment Tax: You are subject to self-employment tax, which covers Social Security and Medicare contributions. For 2024, the self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare).

Business Deductions: You can deduct business expenses such as advertising, office supplies, vehicle expenses, and home office costs, which can significantly reduce your taxable income.

Estimated Taxes: You must pay estimated taxes quarterly to avoid penalties and ensure you cover both your income tax and self-employment tax obligations.

While the Schedule C structure is straightforward and requires less administrative effort, the self-employment tax can be a considerable expense.

S Corporation

Electing to operate as an S Corporation offers a different approach, potentially reducing self-employment taxes. Here’s how it works:

Split Income: As an S Corporation, you can split your income between salary (reported on a W-2) and distributions (reported on Schedule E). This means you are both an employee and a shareholder of your company.

Salary: The salary you pay yourself is subject to payroll taxes (Social Security and Medicare), similar to any other employee and similar to paying self-employment tax.

Distributions: Distributions of the company's profits to you as a shareholder are not subject to self-employment tax. This can result in significant tax savings.

Reasonable Compensation: The IRS requires that the salary you pay yourself must be "reasonable" based on industry standards. Underpaying yourself to avoid payroll taxes can trigger audits and penalties.

Administrative Costs: Operating as an S Corporation involves additional administrative tasks such as payroll processing, filing a separate corporate tax return (Form 1120S), and maintaining corporate records. These responsibilities may incur additional costs and require professional assistance.

Individualized Decisions

Choosing between a Schedule C structure and an S Corporation depends on several factors, including your income level, business expenses, and willingness to handle administrative tasks. Here are a few considerations:

Income Level: Higher income levels can benefit more from the S Corporation structure due to the potential savings on self-employment taxes.

Administrative Burden: S Corporations require more administrative work and potentially higher professional fees for payroll and tax filing services.

Flexibility: The simplicity of the Schedule C structure may be appealing if you prefer a less complex tax situation and lower administrative costs.

Working with Financial Advisors

Given the complexities involved, partnering with a financial advisor who understands the unique needs of realtors can be invaluable. They can help you evaluate the best structure for your situation, optimize your tax strategy, and ensure compliance with all tax regulations​​​​.

In conclusion, while the Schedule C structure offers simplicity and straightforwardness, an S Corporation can provide significant tax advantages, particularly for those with higher incomes. However, it also comes with increased administrative responsibilities and costs. Carefully consider your specific circumstances and consult with a financial advisor to determine the best approach for your real estate business.