Contract Work and Real Estate Investing Under an LLC

[Cathy Ries]

I'm in the tech industry and it hasn't been doing well with all of the widespread layoffs going on. However I am seeing that search agencies have been reaching out to me for contract work. Some want it to be 1099 and others want it to be C2C (which would require me to create a LLC or S Corp). I do not know much about this type of pay arrangement but was wondering if there are any potential financial (tax or otherwise) advantages to doing (non real estate) tech contract work AND real estate investing under your own company instead of working a W2 and doing real estate on the side? Contracts were typically 6-12 months long with potential to extend. All of my W2 jobs have been very demanding, leaving little time to do real estate so I'm trying to find a balance between the 2.

[Ryan Coon]

As a general rule, you should avoid mixing your tech contract work and your real estate investing under a single entity. Combining these under a single business entity not only complicates your taxes for these different activities, but it also creates more exposure from a liability or asset protection perspective.

First, as to the tax element, your tax contracting work will be taxed as active income which means you're going to get hit with both ordinary income taxes and with self-employment/FICA taxes (about 15.3%). If your making a substantial amount of money via this contract work then you may benefit from an S-corp to help mitigate your self-employment taxes. Real estate investing, on the other hand, may be producing passive income, in particular if you are engaged in mid to long term rentals, in which case using an S-corp would actually increase your tax liability. An LLC disregarded for tax purposes would likely be better for this passive income. Thus, optimal tax mitigation would likely involve separate business entities for these different activities.

Second, if you engage in both activities through a single business entity, especially if you hold real estate in the business that you are doing contract work through, then the real estate will be exposed to any possible liabilities or lawsuits involving the contract work. If, instead, you hold real estate in a different business entity, then you can dramatically decrease the liability exposure of the real estate and largely prevent creditors of the contracting business from going after the real estate.