S-Corp vs Schedule C – How You Should File

The Problem

Realtors often question whether they have chosen the correct entity for their business. Most realtors begin as sole proprietors and report their business income and expenses on Schedule C. This method is suitable in the beginning, as income is generally limited. Nonetheless, their income grows with time, and soon they have a net profit of $100k. This is where it becomes vexing. As a sole proprietor, the realtor is responsible for a 15.3% employment tax, which includes 12.4% for Social Security and 2.9% for Medicare. This means the realtor has to pay $15,300 ($100,000x.153) in self-employment taxes alone. At this point, many realtors seek an accountant who can devise a strategy to relieve some of the impact.

What is an S-Corp?

Electing S-corp status can have many benefits, with the most significant being related to employment taxes. However, before we delve into the advantages of S-corp status on self-employment taxes, let’s first understand what an S-corporation is. 

S corporations are corporations that choose to pass their corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. This means that the shareholders of S corporations report the income and losses on their personal tax returns and are taxed at their individual income tax rates. 

It is important to note that shareholders must be paid a reasonable salary, which is then reported to the shareholder on Schedule K-1. A relator with a net income of $100k pays herself a reasonable salary of $65,000. Her self-employment tax is now $9,945 ($65,000×15.3), approximately $5,000 saved just by making this one adjustment. 

Is an S-Corp right for you?

Yes, S-corporations have significant advantages, especially when considering self-employment taxes; however, many considerations should be adequately evaluated before selecting. S-corporations have complex filing requirements; thus, partnering with a professional tax strategist will be paramount. 

If you would like our firm to perform a transcript analysis on your business to determine its most beneficial filing status, book a consult with us today!