As real estate agents we are independent contractors, right? Right! But that doesn’t mean we have to be a sole-proprietor. In fact, I say you shouldn’t be a sole proprietor… you should incorporate. It’s easy to do, and it’s inexpensive. But why should you incorporate? Why go to all the trouble? I believe there are two very compelling reasons.
The first, and most important reason, is to save you money. Lots of money. Let me explain how it will save you money. Let’s assume you’ll earn $100,000 this year practicing real estate. As a self-employed person, or a sole-proprietor like most agents, you will have to pay FICA tax on ever dime you earn, up to $106,800, of 12.4%.
On top of that you have to pay Medicare on every dime, without limit, of another 2.9%. That is a total of 15.3% before you pay a dime of federal or state income tax! Let’s not get too depressing, so let’s assume you are married filing jointly, and that you live in Florida. (Don’t half the agents in the entire nation live in Florida?) Anyway, I chose Florida because it one of only seven states that has no state income tax. Being married and filing jointly puts your federal income tax rate at another 25%. It would be 28% if you are single.
Add that together and you have a whopping 43.3% that goes to Uncle Sam! In other words, you work the first 158 days of the year for the government, and you’re lucky because you have no state income tax! Here in North Carolina, my state gets another 7%. Think about it: that’s twenty-two and a half weeks just to pay your taxes! Twenty-six if you lived in North Carolina. Now let’s look at the same picture if you were incorporated.
Let’s say that your corporation employed you and paid you a salary at a typical agent income of $40,000 for the same year. Now, because you are an employee, the corporation has to pay half of your FICA and medicare tax while you pay the other half. Even counting both halfs, you save $9,180 just in FICA and medicare taxes alone.
Add to that the fact that your corporation can pay your legitimate business expenses, like mileage or vehicle costs, advertising, client meals, and so forth, out of pre-tax dollars. Whatever money you don’t take as legitimate business expenses, you can take as corporate dividends and only pay income tax and not FICA and medicare.
And if your total taxable income (after all your allowable deductions) is under $68,000 then your tax rate is no greater than 15%! That’s a savings in your income tax rate of another 10%! But, your corporation could own your car, and make any payments if there are any. My company owns the car I drive, and my corporation owns a boat too. After all, I must entertain clients sometimes, and I also need to show waterfront property using the company boat.
But there is another benefit: limited liability. In today’s litigious society, that is a huge plus. The corporation is a separate legal entity and if it owns no assets and it distributes its cash regularly, its potential loss in a lawsuit is minimal. You can save a small fortune on liability insurance and E&O coverage. Pretty sweet, eh?
So what is involved in incorporating? Go to your Secretary of State’s website. Often there is a corporation division. Most of the time you can download “template” articles of incorporation right from their website. Otherwise, Google it. Fill in a few blanks, and send the state a check for around one hundred dollars, and you’re done.
Or you might use a service like The Company Corporation, LegalZoom.com, or Lawyers.com and fill in the blanks online. It costs a little more, but you can have them get you all the “stuff” you’ll need, like your minute book, your corporate seal, your sample documents, and some will even apply for your Federal ID number for you. Counting everything, you should be able to do it in a few hours and spend less than a few hundred dollars.
In most states you will have to get a “firm” license to practice as a corporation, but this practice is becoming common enough that you probably won’t have to be a broker or take a broker-in-charge course as long as you are only starting the company simply for tax reasons.
Certainly you will want to check with your state real estate commission to find out the particulars of practicing real estate as a corporation while staying affiliated right where you are now. Every state is going to be different. That having been said, I’m not aware of a single state that doesn’t make provision for agents who wish to practice real estate as a corporate entity.
So you spend a few hundred to save $20,000 a year in taxes? I’d say that’s a pretty good investment. That’s Max-Bang!