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Self-Employment Tax vs. Income Tax for Realtors

Realtors are subject to two distinct types of federal taxes on their net business profits:

• Self-Employment Tax (SE Tax): This tax is 15.3% of your net income (12.4% for Social Security up to wage limits, and 2.9% for Medicare). It is the equivalent of the payroll taxes (FICA) paid by employers and employees.
• Federal & State Income Tax: After subtracting self-employment tax adjustments, your profit is subject to normal graduated federal income tax brackets (ranging from 10% to 37%) and state income taxes where applicable.

How S-Corporation (S-Corp) Elections Save Taxes

By forming an LLC and electing S-Corp tax treatment with the IRS (Form 2553), you become an employee of your own corporation. Your corporate profit is split into W-2 salary and shareholder distributions:

1. W-2 Payroll Compensation: You pay yourself a reasonable salary (e.g. 40% of profit). FICA tax (15.3%) is paid ONLY on this salary amount.
2. Shareholder Distributions: The remaining corporate profit (e.g. 60% of profit) is distributed to you as dividend distributions. These distributions are completely exempt from the 15.3% self-employment tax.

For example, on a net commission profit of $120,000:

• As a Sole Proprietor, you pay approximately $16,950 in self-employment taxes.
• As an S-Corp paying a $48,000 W-2 salary, your FICA tax is only $7,340.
• This results in a gross tax savings of $9,610 per year!

Realtor Quarterly Tax Deadlines

To avoid federal penalties, real estate agents must pay estimated taxes in four annual installments. Keep these dates on your calendar: