What is an S-Corp?

An S-Corpration is a special tax election granted by the IRS. This election allows your LLC to be taxed differently than a sole-proprietorship.

Unlike a sole propeitorship or an LLC, owners of S-Corps do NOT have to pay

self-employment taxes on the net income of the business.

But there is a catch... always something with the IRS...

Owners of S-Corps are required to pay themselves a "reasonable wage" through payroll and the reasonable wage is subject to payroll taxes. The amount you are able to pay yourself as a reasonable wage determines how much you can potentially save by electing to be treated as an LLC.

Feeling a little bit confused on how the S-Corp Election can save you money? You are not alone! Let's walk through an example of how an S-Corp election can save you on your taxes.

S-Corp Election Example

Meet Jack

Jack is a successful real estate agent and last year he had gross commission income of $200,000 and $50,000 of business expenses leaving him with a net profit of $150,000.

Jack elected to do his own taxes on TurboTax instead of using a tax professional. As a result, he files as a sole proprietor meaning all $150,000 of his net income is subject to the 15.3% self-employment taxes.

That comes out to $22,950 in self-employment taxes! Keep in mind that he will still have to pay federal and state income tax on top of this $22,950 – YIKES!

Meet Jill

Jill is also a successful real estate agent and just like Jack, she also had gross commission income of $200,000 and $50,000 of business expenses leaving her with a net profit of $150,000.

Unlike Jack, Jill elected to work with ZanderFi tax professionals, and they helped her form an LLC and make an S-Corp Election with the IRS. They also determined that her reasonable wage was $65,000 for the work she performed for the S-Corp.

Unlike Jack, she does not have to pay self-employment taxes on the entire $150,000 in net income and only pays it on the $65,000 of reasonable wages. That comes out to a total of $9,945

A savings of $13,005 over Jack and thus the power of the

S-Corp Election!!!

So What's The Catch?

As you can see, an S-Corp Election has the power to save a HUGE amount on SELF-EMPLOYMENT TAXES! But it also comes with additional costs and cons to consider in contrast to operating as a sole proprietor:

Uncle Sam – He wants his money and service providers like real estate agents get extra scrutiny when operating as an S-Corp.
Setup Costs – You have additional setup costs in excess of a traditional LLC.
Bookkeeping and Payroll – time consuming and expensive to outsource.
Banking – Must setup a business bank account and separate all personal and business expenses.
Additional Tax Return – Completely separate entity requires a separate return that is much more complex.
Other Taxes and Fees – State and local
Thanks to the Tax Cuts and Jobs Act there is a deduction that allows you to deduct up to 20% of your Qualified Business Income! This is a HUGE DEDUCTION known as QBI!
- HOWEVER… The QBI deduction is subject to limitations and one of those limitations is the W-2 wages paid by the qualified business. In simple terms… if you pay yourself a low reasonable wage to avoid self employment taxes, you might MISS this BIG DEDUCTION!
Retirement Contributions - If you pay yourself a low reasonable wage to avoid self employment taxes, you can often LIMIT the amount you can contribute to your retirement accounts. if you were to pay yourself a higher wage and make higher contributions to your retirement account, it may have SAVED YOU MORE IN TAXES than paying yourself a low wage did… and you are putting money away for your future!

The skyline at night seen from Spa Beach Park, in Saint Petersburg, Florida..jpg

Level up your real estate career with an S-corp

"Joining ZanderFi will help you save both taxes and time - we guarantee that. But at it's core, a membership is so much more than tax and time savings. When you join ZanderFi and form an S-Corp, it will shift your mindset to a much larger scale.

You are no longer a self-employed 1099 contractor working in real estate. You are now the CEO of a real estate company. Time to build your empire!"

Sam Hasbrouck - Founder of ZanderFi

Is The S-Corporation Election Right For Me?

The "guru's on TikTok will tell you it's incredibly simple to form an S-Corp and everyone should do it. The reality is that is a very complicated tax structure and it doesn't make sense for everyone. In fact, since the passage of the Tax Cuts and Jobs Act passed by the Trump Administration, we are seeing less and less situations where an S-Corp makes sense.

We cannot stress this enough…

If your accountant or so called tax guru advises an S-Corp but DOESN’T factor in the following items:

Reasonable Compensation for your role
The impact of your wages on the QBI Deduction
Your Retirement Plan

And they simply tell you that you will save on self-employment taxes if you form an S-Corp...

RUN, RUN as fast as you can….

This is not an accountant that has your best interest in mind.

They are simply getting you to pay for additional services that pad their own pockets!

That being said, we offer a FREE Consultation to see if operating your real estate company as an S-Corporation can reduce the amount of CASH you fork over to Uncle Sam every year!