Over the past few months several realtors have asked me: “Is it true that if I form a LLC (limited liability company) and run my real estate business through it I can pay less in taxes?” Before I answer that question I must clarify that I am NOT an accountant and this post should not be relied on as accounting advice. This post may, however, be used as “food for thought” and the basis for a discussion with your accountant. I know a number of accountants and they all have different approaches and opinions when it comes to various tax saving “strategies”. The structure below may not work for each realtor (based on your specific situation) and/or your accountant’s position on the issue.
So what’s the answer? The short answer is yes as long as you make an S-corporation tax election.
So what is the difference in potential tax liability when you run your real estate business in your own name (like most realtors do) versus a LLC (and have made a S-corporation tax election)?
Real Estate business is in your individual name or in a LLC (without a tax election):
When you run your real estate business in your individual name (in other words you receive your commission checks in your name), the net income is subject to self-employment tax. Self-employment tax is both Social Security and Medicare tax (totaling 15.3% and includes both the employee and employer portions). If you run your real estate business through an LLC (in other words you receive your commission checks in the name of the LLC) and make no tax election, you are treated as an individual for tax purposes just like you do not even have an LLC. In either scenario, you pay to the government self-employment tax and individual income tax (rates vary on amounts) on all of the money you have been paid for the year (less other personal and/or business deductions obviously).
Real Estate business is in a LLC (and make an S-corporation tax election):
When you run your real estate business through an LLC (and have made a S-corporation tax election), it allows you to pay yourself a reasonable salary and the remainder of the money you were paid (or technically your LLC was paid) you can distribute to yourself as an owner draw (also known as a distribution) (which is separate and distinct from your salary). The salary versus the owner draw distinction is the critical part of all of this.
Why you say? Because you ONLY pay self-employment tax on your net income (or net salary), and you do not pay self-employment tax on the money that you distribute to yourself as an owner draw. I know it sounds crazy, but that is what I am told. So effectively, by not paying self-employment tax on the owner draw component (versus the salary), you may end up saving significantly on your taxes. Also, (1) you should note that there are certain timelines which govern when an S-corporation tax election is made and (2) when paying yourself a salary you are required to file additional returns for payroll on a quarterly basis. That’s all I know.
So what is the bottom line? First, go talk with your accountant to learn more! Next, if you need a recommendation for a great accountant I can give you a few names if you would like to learn more about this issue.
If you have any questions regarding this post, please contact me at (912) 484-1996 or firstname.lastname@example.org