Tax strategies for 1099

Tax, SDIRAs & Cost Segregation
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Tax strategies for 1099

Christian D.
Real Estate Broker · New York, NY · Member since 2013 · 125 posts · 63 votes

I have REPS by actively and materially participating in my rental property portfolio, and also work as a real estate broker full time (1099 collecting commissions through a single member/purpose LLC) from buildings I sell.

My losses from my rental properties (LLC #A) largely offset any federal and state taxes from my brokerage business (LLC #B). However, my commission income is not shielded from self employment taxes. Can someone explain the advantages of having (LLC #B) taxed as an S-Corp as I am told only my "reasonable salary" paid out from (LLC #B) would be subject to self employment taxes.

I.e., I earn $200K through commissions through LLC #B. Currently all $200K is subject to self employment taxes ($30K tax bill).

If taxed as an S-Corp, I could pay myself $50K as a salary, and only the $50K would be subject to self employment taxes ($7.5k tax bill). The other $150K is treated as distributions and isn't subject to self employment taxes. The remaining $150K in this case is still eligible to be offset by any NOL from my rental properties from LLC #A.

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  • Bill HamptonBusiness Member
    Accredited Investment Fiduciary, AIF®, Financial Planner, Tax Strategist, Real Estate Investor · Atlanta, GA · Member since 2012 · 2k+ posts · 978 votes
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    @Christian D.

    There are other ways to reduce your taxes besides becoming an S-corp. 

    For instance, you can open a solo 401k retirement plan and make contributions as an employer and employee. You can contribute up to $69,000 combined as an employer and employee depending on your income. These retirement contributions will significantly reduce your tax liabilities. You can open these accounts for free with various financial institutions. 

    Becoming an S-corp has some downsides including additional tax prep fees, payroll processing fees and lower social security income in retirement. 

    I recommend speaking with a tax strategist to discuss options to reduce your tax liabilities without becoming an S-corp. 

    Good luck. 

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    1y
    Quote from @Christian D.:

    I have REPS by actively and materially participating in my rental property portfolio, and also work as a real estate broker full time (1099 collecting commissions through a single member/purpose LLC) from buildings I sell.

    My losses from my rental properties (LLC #A) largely offset any federal and state taxes from my brokerage business (LLC #B). However, my commission income is not shielded from self employment taxes. Can someone explain the advantages of having (LLC #B) taxed as an S-Corp as I am told only my "reasonable salary" paid out from (LLC #B) would be subject to self employment taxes.

    I.e., I earn $200K through commissions through LLC #B. Currently all $200K is subject to self employment taxes ($30K tax bill).

    If taxed as an S-Corp, I could pay myself $50K as a salary, and only the $50K would be subject to self employment taxes ($7.5k tax bill). The other $150K is treated as distributions and isn't subject to self employment taxes. The remaining $150K in this case is still eligible to be offset by any NOL from my rental properties from LLC #A.


    You already explained the basic idea yourself, so there is no need for us to do it. I will only add two gotchas.

    1. Your math is not accurate. Your SE tax on $200k is less than $30k, and your SE tax on $50k is more than $7.5k. It's not a straight 15%. Details are too technical to dive into. You do get SE tax savings, just not as much as you estimated.

    2. It's highly debatable whether $50k can be considered "reasonable compensation" if you make $200k from commissions on the properties you sell yourself (as opposed to a split with your agents).

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    1y

    @Christian D. Electing S-Corp taxation for your brokerage LLC #B can significantly reduce self-employment taxes while still allowing rental losses from LLC #A to offset federal and state income taxes.

    As a single-member LLC, your entire $200K commission income is subject to 15.3% self-employment tax ($30K). By electing S-Corp status, you can pay yourself a reasonable salary (e.g., $50K, taxed at 15.3% for $7.5K in self-employment tax) and take the remaining $150K as distributions, which are not subject to self-employment tax, saving $22.5K. Your rental losses from LLC #A can still offset your brokerage income tax but won’t reduce self-employment tax. The IRS requires a reasonable salary, so setting it too low could lead to reclassification and penalties.

    Additionally, S-Corp compliance costs (payroll, tax filings) typically range from $1K–$3K annually. If structured correctly, an S-Corp can offer significant tax savings while maintaining the benefit of rental loss deductions. Consulting a tax advisor is recommended to optimize salary and compliance.

    This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

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  • Aaron ZimmermanBusiness Member
    Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
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    It  really depends what your overall goals are but I’ve found that S Corps are beneficial at this income range. As others have said, you’ll save some self employment tax but the key is a reasonable wage that you must pay yourself from your s corp if you decide to go that route. 

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