Real Estate Agent forming an LLC w/ S-Corp Status

[Matthew Shay]

I am interested in forming an LLC w/ S-corp status for tax implications. The idea would be to build a team and protect my brand. I have heard some people say that forming an LLC is mainly for legal protection and others who say that it is an advantage for lowering taxes. How much income do you need to make in order to make it worth the tax benefit? Setting up an LLC in NY costs a few hundred dollars I am assuming without hiring an attorney

[Stanley Bronstein]

@Matthew Shay - What @Irene Nash says is pretty spot on. The biggest problem with electing S Corp status is the complexity. In order to take advantage of potential tax savings, you have to essentially put yourself on payroll, cut yourself payroll checks, make payroll tax deposits, and file quarterly payroll tax returns.

The payroll tax savings is because you start paying yourself what's known as a Reasonable Salary, and your S Corp retains the rest as earnings.  You only pay social security and medicare on the Reasonable Salary portion, but not on the earnings of the business.  You pay income tax on both.

Plus, it's an area where the IRS is very audit sensitive. If you try to go too far and do too much and say that too little (or none) of your earnings are salary, you potentially open yourself up to being on the losing side of an audit.  There are some leading IRS cases from several years back where doctors and their CPA got nailed to the wall over this.  If you get audited, the IRS is going to ask you for documentation as to how you determined what portion of your earnings should be classified as Reasonable Salary.  The burden of proof will be on you, the taxpayer, to justify what you did.

On the flip side, if you do a LLC, you pay social security and medicare on ALL of your income, BUT you don't have to put yourself on payroll, you don't have to file payroll tax returns and you don't have to worry about audit issues over your salary.

As for when it starts to make sense - Yes, it starts to make sense at $50,000, but the savings still aren't all that large until you get up around $100,000 or so.  Basically, you're saving roughly 15.3% on any amounts you are able to take as earnings of the S Corp, as opposed to them being classified as salary.

Here's a rough example: Say you got $50,000 in net income after expenses from your real estate activities as an agent.

If you're a LLC, you'll pay $7,650 ($50,000 at 15.3%) for social security and medicare.

If you're an S Corp, you might be able to say $30,000 or so is salary and you'll pay $4,950 ($30,000 x 15.3%) for social security and medicare.  If you want to be more conservative and say $40,000 was salary, then you'd pay $6,120 ($40,000 x 15.3% for social security and medicare.  Generally, the more conservative you are, the less audit risk you have.

So you can potentially $1,530 to $2,700 in my example.

To get that savings, you have to fill out a lot of paperwork yourself, or pay your CPA to do it for you.  Your savings quickly evaporate if you have to pay someone else to do all the paperwork.

Now if you start making $100,000 or more, the savings can begin to grow larger (but the audit risk grows as well).