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As a Real Estate Agent, Should You Incorporate?

New and experienced real estate agents alike should consider all of the benefits of incorporation—especially when it comes to taxes.

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If you're new to real estate, then you might have big questions about how to get started. In your former job, you probably didn't have to worry about difficult questions having to do with business formation.

Now, as you start out as a real estate agent, you're trying to figure out incorporation and everything that goes with it. This brings to bear an important question:

Should you, as a real estate agent, choose to incorporate?

Incorporation can be helpful for some. But before you make this decision, you need to first consider you unique circumstances. Here are a few things you should know:

Understanding your status as a non-employee

When enter the real estate field, you will most likely work with Keller Williams, Re-Max, or one of the other big realty companies. They will provide the training, the marketing materials and some of the other essentials to get you going. This is important in the beginning, but it can also subject you to some fairly harsh tax policies on the back end. Problematically, the IRS has decided that real estate agents are non-employees. This is dictated by statute, so there’s nothing you can do to challenge it.

Because you’re not considered an employee, the company with which you have an affiliation will send you a 1099-form at the end of the year. On this form, you’ll describe how much income you have made, or how much they have paid you. This form will also be reported to the IRS. It’s then your responsibility to make sure that you report the amount listed on the form so that you can pay taxes.

This is more than just a minor hassle. It also creates an unfortunate self-employment tax situation.

Understanding the self-employment tax

If you’re employed by a company, they will typically pay for half of your Social Security and Medicare taxes. You'll only be hit with around 7.5 percent in costs to cover those government expenditures. If you're self-employed, though, you carry the full burden of this tax. You'll be required to pay more than just 15 percent in self-employment tax. This is in addition to your income taxes, which are based on how much you earn.

Many incoming agents are surprised to learn that without proper planning, they can end up paying as much as 40 percent of their income in taxes. Incorporating can help to alleviate this problem. This is why so many agents are choosing this option today.

Incorporation and the reasonable wage requirement

If you incorporate, you will not be subject to self-employment taxes. However, you are required to pay yourself a reasonable salary in order to do so. Those who incorporate and then get the solid advice of a tax professional can structure their owner profit distributions along with their other expenses to ensure that they pay the right amount in taxes.

As a hard-working person, it makes little sense to just give away value. You should be smart about how you structure your realty practice. Incorporation is a good tool to help with this.

Taking advantage of your personal property

As a new real estate agent, you likely will not have an office or a company car. You'll be using a home office and your personal car to conduct business for the corporation. This is a smart arrangement to save money, but incorporating can make it even easier. For instance, you can choose to enter into an official agreement with the corporation where it pays you for the use of the office and vehicle. This way, you will be able to legally pay money out of the corporation to yourself as an individual, thus lessening your tax burden and allowing you to retain more of what you make. This is not possible without incorporating.

New real estate agents would be wise to seriously consider incorporation. You may end up much better off at the end of the tax year. You'll be protected against some types of liability from client claims. You'll be able to arrange your expenses in a way that makes sense.

It's a move at the beginning of your career that can pay big dividends on the back end!

If you’ve decided to incorporate, the next question to ask is: When should real estate agents incorporate?

MaxFilings has everything you need to incorporate with confidence in our Real Estate Incorporation Guide!