For many real estate service providers—whether you’re a realtor, HVAC company owner, or interior designer—the choice of business structure can have a significant impact on your taxes and overall financial health. While many start as sole proprietors or LLCs, transitioning to an S-Corp can offer substantial tax savings and other benefits. Here’s a step-by-step breakdown to help you understand the advantages and responsibilities of this structure.
Starting as a Sole Proprietor or LLC
Most small business owners begin as sole proprietors or form a Limited Liability Company (LLC) for legal protection and simplicity. However, it’s important to understand how these structures are taxed:
- Sole Proprietor Taxation: Income from the business is reported on Schedule C of your personal tax return. You pay self-employment taxes (15.3% for Social Security and Medicare) on your net earnings.
- LLC Taxation: By default, a single-member LLC is taxed the same as a sole proprietorship. Multi-member LLCs are taxed as partnerships unless another election is made. While an LLC provides legal protections, it doesn’t automatically save on taxes.
Key Point: Both sole proprietors and LLC owners pay self-employment taxes on all business profits. This is where the S-Corp election comes in.
What Is an S-Corp Election?
An S-Corp isn’t a separate type of business entity—it’s a tax designation that LLCs and corporations can elect by filing Form 2553 with the IRS. This election allows you to split your income into two categories:
- Reasonable Salary: You must pay yourself a reasonable salary for the work you do.
- Distributions: Profits above and beyond your salary can be taken as distributions, which aren’t subject to self-employment taxes.
Benefits of Becoming an S-Corp
- Significant Tax Savings
- By reducing the portion of income subject to self-employment taxes, an S-Corp can save thousands of dollars annually, especially for high-income earners.
- Example:
- Net business income: $120,000
- As an LLC: You pay self-employment tax (15.3%) on the full $120,000 = $18,360.
- As an S-Corp: If you set a reasonable salary at $60,000, you only pay self-employment tax on the $60,000 salary ($9,180), saving $9,180 in taxes.
- Professional Credibility
- Operating as an S-Corp can boost your professional image. For realtors, HVAC company owners, or interior designers, presenting yourself as a corporation adds a layer of sophistication that can resonate with clients and partners.
- Ability to Contribute to Retirement Plans
- S-Corp owners can set up retirement plans such as SEP IRAs or Solo 401(k)s, which allow for higher contribution limits and tax-deferred growth.
- Flexibility in Income Distribution
- By taking distributions instead of salary for a portion of your income, you can lower your overall tax burden while still receiving the financial benefits of your business’s success.
Additional Obligations of an S-Corp
While the benefits of an S-Corp are clear, there are additional responsibilities to keep in mind:
- Filing Form 1120-S
- S-Corps must file an annual corporate tax return (Form 1120-S), which requires detailed recordkeeping.
- Running Payroll
- You must pay yourself a reasonable salary through payroll, which means setting up payroll processing and filing quarterly payroll tax returns.
- State Compliance
- Some states impose franchise taxes or additional fees on S-Corps, so it’s important to understand your state’s specific requirements.
- Ongoing Bookkeeping
- Maintaining accurate financial records is critical for compliance and to properly allocate income between salary and distributions.
- Shareholder Restrictions
- An S-Corp can only have up to 100 shareholders, and all must be U.S. citizens or residents.
Who Should Consider an S-Corp?
An S-Corp election is ideal for real estate service providers whose businesses generate consistent profits above $50,000 annually. For instance:
- Realtors with high commission earnings can save on self-employment taxes while still taking home a significant portion of their income as distributions.
- HVAC Company Owners can use the savings to reinvest in their business, purchase equipment, or hire additional staff.
- Interior Designers making over $1 million per year can dramatically reduce their tax liability and free up capital for business expansion.
How Gilmer Ferretti Can Help
At Gilmer Ferretti, we specialize in helping real estate entrepreneurs and service providers navigate the complexities of business structuring and tax strategy. If you’re considering an S-Corp election, we’ll help you:
- Analyze whether the S-Corp is the right fit for your business.
- Set up payroll and ensure compliance with all tax filing requirements.
- Maximize your tax savings while staying aligned with IRS regulations.
Take the Next Step
The transition to an S-Corp isn’t just about saving on taxes—it’s about setting your business up for long-term success. Contact Gilmer Ferretti today to schedule a consultation and discover how we can help you leverage the benefits of an S-Corp to grow your business.
By understanding the tax implications of your business structure and making strategic decisions, you can take control of your financial future. Let’s get started today!