S Corp Election or Not: House Flipping in MASSACHUSETTS
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Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votesAn S-Corp is not always the best solution and may not be in your case.
If you are intending to maintain regular W-2 jobs and you are already at or near the Social Security limit in that job, then an S-Corp does nothing for you other than tack an unnecessary 6.2% of tax onto your earnings.
Here's how it works.
Your employer withholds 6.2% of social security tax from your paycheck up to the limit ($118,500 in 2017) and 1.45% of Medicare Tax. Your employer then matches these amounts and submits it to the government as FICA tax. So a total of 15.3% of FICA tax is paid by you and your employer.
Self Employment Tax is essentially this same FICA tax. You pay 6.2% x 2 (employee and employer portion) on the first $118,500 of profits and 1.45% x 2 on all profits.
It's the same tax, just structured differently depending on whether you work for yourself or work for somebody else.
The IRS *requires* officers of an S-Corp to pay themselves a reasonable salary. For example purposes, let's say that a reasonable salary for what you are doing is $50,000.
Let's say you also make $100,000 from your W-2.
So your employer and you together pay $15,300 of FICA taxes on your W-2 job.
You also pay $7,650 of FICA/SE Tax on your S-Corp salary.
Now when you do your taxes, all competent software packages will recognize that you've gone over the Social Security limit between the two jobs. In this scenario, that overage is $31500, so you've over withheld 6.2% x $31500 on your paychecks or $1953. You'll get that back as a credit on your 1040.
But, your S-Corp matched that $1953 in FICA tax. That is lost. Nobody gets that back. It's a gift to the government for having not thought through your structure properly.
Now if you had been a regular LLC, you never would have paid that $1953 in tax because all competent software recognizes that you already met your Social Security limit and all is well.
Now, if you've got relatively lower salary and lower S-corp salary that does not go over the Social Security limit when combined, then it's no harm, no foul and you absolutely do save a lot of taxes in structuring as an S-Corp.
Guys - taxation is NEVER cut and dried. There are no cookie cutter approaches or "one best method" that works for everybody.
OP - Talk to a competent CPA and outline your entire life for them so they can make an excellent recommendation based on ALL facts and circumstances.
And just because you start off with one great structure that works for you right now, does not mean that structure will continue to work for you as your life progresses. Get married, have kids, have a spouse gain or lose a job, start another business... these shouldn't be called "life events", they should be called "tax events".
Keep your CPA apprised as to what's going on in your life because it can drastically change the recommendations they make for your business(es).
7 Replies
- Real Estate Agent · Boston, MA · Member since 2016 · 13 posts · 2 votes9yI'm not an accountant, but if I remember correctly our accountant said unless you are paying yourselves a regular and reasonable salary you should not file as an S-Corp. Hopefully, there's an accountant out there that can confirm. Best of luck your flips! Happy to answer questions or talk shop anytime just reach out.
- 9yLance LvovskyPro MemberAccountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votesElect to be taxed as a S Corp for your LLC if you will be flipping homes. You can pay yourselves a "reasonable salary" for some of the profits, and the remaining profits can be distributed as dividend income not subject to FICA
- Rental Property Investor · Broken Arrow, OK · Member since 2016 · 1k+ posts · 1k+ votes9y
I'm not a cpa, but I didn't elect to be taxed as an S Corp my first year and it cost me a lot of additional taxes in self employment. I changed it starting in 2017 after consulting with my tax attorney and CPA. Paying myself a salary this year and the balance as dividend will save a lot in taxes. Also, added a Solo 401K for other tax advantages.
- 9yThomas FranklinPro MemberReal Estate Investor · Miami, FL · Member since 2010 · 939 posts · 739 votesNA Mass I invite you to please consider the following, from a Federal Income Tax Filing Perspective. I cannot stress the importance of finding a very good Investor Friendly CPA. Below are some things you may wish to consider, as to which Corporate Enity is best, for your Business Model as well as your REI Goals and objectives. Flipping Properties If the primary objective of your real estate business, or one of your real estate businesses, is to buy, potentially fix up an existing property and resell it within one year, the Internal Revenue Service can consider that to be an active trade or business. Unlike passive rental income, the income from an active trade or business is subject to self employment tax (a nasty 15% tax commonly referred to a "social security and medicare" by working folks). If your goal is to reduce that self-employment tax to a minimum, an S Corporation is the best entity to use. Why? It is the only entity structure whose rules allow the business owner to take a “reasonable salary” (subject to social security and medicare) and then take the remaining profit (often as much as 50% of the remaining income) out as distributions not subject to self-employment taxes. Correspondingly, all business income taken from an LLC under similar circumstances is subject to self-employment taxes. For a business owner with $100,000 taxable annual income, the net tax savings for using an S Corporation instead of an LLC in taxes paid every year can be as high as $7,500. Holding Properties When holding properties as a cash flow investor, the LLC (or LP) is generally the better choice because an LLC has more liberal distribution rules. The key here is flexibility. LLC distributions come out of the LLC at cost basis. The members of an LLC are issued K-1 Form and have to pay taxes on all profits as though it were income, which could expose the owners to high employment taxes. Also, an LLC can elect to be taxed like an S Corporation. While there is never only one answer that is correct for all circumstances, there is a general rule that is almost always the correct choice. So remember, for legal and tax planning, a good CPA will recommend that clients hold their properties in an LLC or Limited Partnership and run their businesses as S Corporations to avoid self-employment taxes. I hope you find the above information useful, in guiding your decision regarding which Corporate Entity is best suited, for your REI Endeavors.
- 9yLinda WeygantPro MemberInvestor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
An S-Corp is not always the best solution and may not be in your case.
If you are intending to maintain regular W-2 jobs and you are already at or near the Social Security limit in that job, then an S-Corp does nothing for you other than tack an unnecessary 6.2% of tax onto your earnings.
Here's how it works.
Your employer withholds 6.2% of social security tax from your paycheck up to the limit ($118,500 in 2017) and 1.45% of Medicare Tax. Your employer then matches these amounts and submits it to the government as FICA tax. So a total of 15.3% of FICA tax is paid by you and your employer.
Self Employment Tax is essentially this same FICA tax. You pay 6.2% x 2 (employee and employer portion) on the first $118,500 of profits and 1.45% x 2 on all profits.
It's the same tax, just structured differently depending on whether you work for yourself or work for somebody else.
The IRS *requires* officers of an S-Corp to pay themselves a reasonable salary. For example purposes, let's say that a reasonable salary for what you are doing is $50,000.
Let's say you also make $100,000 from your W-2.
So your employer and you together pay $15,300 of FICA taxes on your W-2 job.
You also pay $7,650 of FICA/SE Tax on your S-Corp salary.
Now when you do your taxes, all competent software packages will recognize that you've gone over the Social Security limit between the two jobs. In this scenario, that overage is $31500, so you've over withheld 6.2% x $31500 on your paychecks or $1953. You'll get that back as a credit on your 1040.
But, your S-Corp matched that $1953 in FICA tax. That is lost. Nobody gets that back. It's a gift to the government for having not thought through your structure properly.
Now if you had been a regular LLC, you never would have paid that $1953 in tax because all competent software recognizes that you already met your Social Security limit and all is well.
Now, if you've got relatively lower salary and lower S-corp salary that does not go over the Social Security limit when combined, then it's no harm, no foul and you absolutely do save a lot of taxes in structuring as an S-Corp.
Guys - taxation is NEVER cut and dried. There are no cookie cutter approaches or "one best method" that works for everybody.
OP - Talk to a competent CPA and outline your entire life for them so they can make an excellent recommendation based on ALL facts and circumstances.
And just because you start off with one great structure that works for you right now, does not mean that structure will continue to work for you as your life progresses. Get married, have kids, have a spouse gain or lose a job, start another business... these shouldn't be called "life events", they should be called "tax events".
Keep your CPA apprised as to what's going on in your life because it can drastically change the recommendations they make for your business(es).
- 9yKuba F.Pro MemberReal Estate Investor · Los Angeles, CA · Member since 2013 · 2k+ posts · 694 votes
You also have to consider if there's an additional cost to filing as an S-Corp with your CPA and whether your CPA fees exceed any benefit you may get from paying yourself a reasonable salary. With 50K in profit you may save $3000-$4000 in taxes, but will you pay that in filing fees? With 1-3 flips you may not make that much. You're likely to lose money on your first flip. You might even decide that flipping is not for you before the year is over. My personal preference is to keep it simple (LLC) until such time as complicated is necessary.
- Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes9y
If your S corp did $50k and you paid $4,000 in filing fees you need a new CPA.
This is picking up pennies while looking past dollars. You should work with a CPA to figure out the best LONG TERM tax saving strategy, not choose your structure based on a one time annual fee that should never exceed your actual tax.
A CPA should ADD value .
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