You Earned It, Don't Give It Away To Uncle Sam if You Don't Have To!

As Independent Contractors, real estate agents earn money differently than people with W-2 income.  If you used to have a job and haven't run your own business before, you might not be planning your tax strategy effectively to reduce your annual tax bills.

If you are paying too much in taxes, or are a sole proprietor, read up!

I have been an independent contractor (real estate investing coach) for years and I am also a real estate professional, buying and managing my own investment properties.  For the first few years, I did my taxes myself, but after getting a few "OOPS, YOU DID IT WRONG" notices from the IRS (Scary!) I decided I needed an accountant to help me get things handled right!

I'm glad I switched, now I don't have to do all my own bookkeeping and tax returns (I used to have to shut down the office two weeks every spring to sort out all the paperwork!)  Besides saving me time, my accountant knows all the best ways to save me money...  I don't have to pay as much self-employment tax, I am a real estate professional, so I can deduct more of my investment losses (like depreciation), and I am in a lower tax bracket than I otherwise would be after calculating in my home office deduction, vehicle mileage, marketing costs, and other business expenses.

My accountant recommended creating an LLC to take my commissions as a real estate agent.

In talking with my accountant about using entities for my real estate agent business, she highly suggested using my LLC (taxed as an S-corp) to hold my real estate license.

As I found in my prior consulting work, the self-employment tax rate on income from personal service activies is 15% because you're paying both sides (employer and employee) of FICA. 

That means when you earn income as a sole proprietor and report it on your Schedule C on your 1040, you have to pay 15% off the top for FICA on any income you make.  Then what's left is taxed at your regular income tax rate.

So, if you earned $100,000, you'd have to pay $15,000 in FICA taxes.  Then your $85,000 remaining income could be reduced by standard deductions and the like, and you'd pay your personal income tax on the balance.

When you have an LLC in place, you cam pay yourself a salary with part of your income (still subject to self-employment tax) and take the rest out as Owner Distributions which are at a lower rate.

For example, if you earned $100,000 and paid yourself a salary of $50,000 you'd pay 15% for FICA on your salary.  But you would NOT have to pay the full 15% on the $50,000 you took out as a distribution.

(DISCLAIMER: You should check all this over with your own advisor, I am NOT a CPA, just repeating my understanding of how it all works, here!)

Consider Talking To a Tax Strategist!

The main thing to remember is that as business owners (and investors, if you own real estate) there are a lot of tax savings available to us if you do it right!

If you're leaving money on the table, talk with a tax advisor now... chances are you will reduce your audit risk, pay less in taxes, have better record keeping, and the more you make, the more you will save!

Emily

Contact Emily J. Cressey, a commercial sales agent in Seattle, Washington at 877-762-7332 to list your commercial property for sale or to purchase a property in Seattle, Bellevue, Everett, Marysville, Renton, Redmond, Kirkland, Des Moines, Issaquah, Tacoma, or the rest of Snohomish County, King County, or Pierce County, Washington.

I am accepting referrals. 

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