Just read a great article from RE/MAX on why realtors should incorporate.
But it is not just realtors that should heed this advice. We have been providing this advice to our small business clients for many years. Incorporation with an S Corp status election gives you some control over how much self-employment tax you have to pay. Our clients typically see about $1000 in reduced tax liability for every $20,000 in profit.
This flexibility is not available with partnerships or sole proprietorships or LLC’s taxed as either of those entities.
There are a few things that are done differently as a corporation, such as home office expenses (use a reimbursement plan) and deducting health insurance premiums can be tricky but, for most businesses, these deductions are still available as are other business deductions you are used to taking, such as rent, office supplies, advertising, and so on. S Corps do not pay taxes but instead are considered a pass-thru entity, with profits or losses flowing to the owners personal tax returns.
You can’t take all of your profit as a distribution. By incorporating, you become an employee of your corporation. You have to pay yourself a nominal salary subject to FICA and Medicare because a corporation is an entity in and of itself and someone has to do the work, that being you, the employee. But a large portion of your profit can be taken as a distribution, which is not subject to self-employment tax. That is where a large part of your tax savings come from.
There are additional costs with this strategy but generally we see a break-even point around $3000-$5000 of profit depending on particular circumstances for each business. For sole proprietorships or LLC’s taxed as a sole proprietorship (Schedule C), the break even point is where the benefits of using this strategy outweigh the additional costs occurred. That is a pretty low threshold.
And the benefits occur annually. You’ve got to love that.
If you would like to read the entire article that prompted this post, go to https://joinremaxaction.wordpress.com/2013/02/11/realtors-should-incorporate/.
For a free consultation on whether or not an entity change would be beneficial for your business, give Bill a call at AFS.
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