Real Estate Agent LLC or S Corp: Can Commissions Be Paid to It?

Real estate agent LLC or S corp: what does each one change?

A real estate agent can own an LLC or an S corporation, but two separate rules decide what it does. Your state's real estate licensing law decides whether your brokerage may pay an entity you own; your own license stays in your name. Federal tax law decides what that changes: a one-owner LLC changes nothing on its own, and only an S corporation election changes how your Social Security and Medicare tax is figured. The election saves only when commission profit is well above the reasonable salary the corporation must pay you, by more than the payroll, corporate return and state taxes it adds.

Sources: 26 U.S.C. 3508, single-member LLCs, Form W-9, 1099-NEC instructions and S corporations.

A case stops being simple when:

• Commissions were already paid to an entity before your state allowed it.
• You formed an LLC, are still on Schedule C, and are not sure an S election was ever filed or accepted.
• A high-commission year makes you ask whether an S election now pays; the election is hard to undo if commissions drop.
• You are married in a community property state, or an owner is not a US citizen or resident.
• You pay an assistant, lead a team or split commissions with other agents.
• Your brokerage asks for entity documents or a new W-9.

Gather: your last two years' Forms 1099-NEC and commission statements, your independent contractor agreement with the brokerage, your license type and state, and the entity's formation papers, EIN letter and any IRS letter accepting a Form 2553.

Is a real estate agent self-employed for tax?

Usually yes. For federal tax, a licensed real estate agent is not an employee, and the brokerage is not an employer, when substantially all the agent's pay is tied to sales or other output rather than hours worked, and the work is done under a written contract stating the agent will not be treated as an employee for federal tax (26 U.S.C. 3508). The IRS calls these agents statutory nonemployees and treats them as self-employed for all federal tax purposes, including income and employment taxes (Publication 15-A).

So a commission agent reports income and expenses on Schedule C and figures self-employment tax on Schedule SE. The tax is 15.3%: 12.4% for Social Security, which stops once combined wages and net earnings reach $184,500, and 2.9% for Medicare, with no cap (IRS).

If you are paid by the hour or have no such written contract, this rule does not apply and the ordinary employee-or-contractor test decides your status; see workers who may be employees.

Can my brokerage pay my commission to my LLC instead of me?

Only if your state's licensing law allows it. Commissions flow through your sponsoring broker, and each state decides whether an entity you own may receive them and what it must register or license first. Tax law does not answer this question.

Other states set their own rules. Ask your state's real estate commission three things: may an entity you own receive your commissions, must it be registered or licensed first, and how must the broker pay it. Even where the law allows it, your brokerage's own policy and your independent contractor agreement decide whether it will pay an entity.

Does an LLC alone change my tax as a real estate agent?

No. An LLC with one owner is ignored for federal income tax unless it elects corporate tax, so its commissions stay on your Schedule C, and you pay self-employment tax exactly as a sole proprietor does (IRS).

The brokerage's records must still match. On Form W-9 a one-owner LLC with no election puts the owner's name on line 1, the LLC's name on line 2, the owner's classification on line 3a, and the owner's SSN or EIN, not the LLC's EIN (Form W-9; IRS). The brokerage's 1099-NEC then shows your name and number. Without a correct number, nonemployee pay can be subject to backup withholding at 24% (Form W-9).

What an LLC does change is state paperwork. Texas makes LLCs, including one-owner LLCs, franchise tax filers, while a sole proprietorship is not a taxable entity; below the no-tax-due threshold that means a yearly information report, not a tax payment (Texas Comptroller); see Texas franchise tax. California charges every LLC organized or doing business there an annual tax of $800, plus a fee once its total California income reaches $250,000 (FTB). What an LLC does and does not protect you from, apart from tax, is covered in do independent contractors need an LLC. An LLC owned with a spouse is a different case; see spouse and family LLCs.

When does an S corp pay off for a real estate agent, and what is a reasonable salary?

When commission profit is well above the salary the corporation must pay you, because profit paid out beyond a reasonable salary carries no Social Security or Medicare tax. For a solo agent that salary has to reflect that the agent's own work earns nearly every commission.

The IRS says an S corporation must pay a shareholder-employee reasonable compensation for services before making non-wage distributions, and it can reclassify distributions as wages (IRS). Officers who perform more than minor services are employees, and their pay is wages (IRS). The IRS looks at where receipts come from: receipts produced by your personal services point to wages, while receipts produced by non-owner employees or equipment can support distributions. Its factors include training and experience, duties, time devoted, and what comparable businesses pay for similar services (IRS).

For the break-even math, see when an S election pays off. For setting the salary, see S corporation owner salary. For what the books, payroll and return typically cost, see S corporation accounting cost.

How do I make the S election, and when?

File Form 2553, signed by an officer with every shareholder's consent in column K, no more than 2 months and 15 days after the start of the tax year it should take effect, or at any time in the tax year before. For an existing calendar-year LLC that wants S status from January 1, that is March 15. An eligible LLC that files Form 2553 is treated as a corporation from the election's effective date and does not also file Form 8832 (Form 2553 instructions).

If your spouse has a community interest in the shares or their income, as can happen in community property states such as Texas and California, your spouse must consent too. The corporation can have no nonresident alien shareholder and only one class of stock; see who can own an S corporation. Once made, the election stays in effect until it is revoked or terminated, and electing again before the fifth tax year after that generally needs IRS consent (Form 2553 instructions).

The IRS should generally send its decision within 60 days; if no notice arrives within 2 months of filing, the instructions say to follow up by phone. Keep the acceptance letter: Texas asks for an accepted Form 2553 or determination letter when an S corporation registers to receive compensation, while an LLC registers with its formation and ownership papers (TREC).

• A brand-new entity counts from the day its first tax year begins: see S corporation from day one.
• Some states need their own election, and New York City does not recognize S status, taxing S corporations under its general corporation tax (NYC Finance): see state S corporation elections.
• Deadline missed: see late S corporation election relief.

What does the brokerage need from me once the entity is paid?

A new W-9 in the entity's name, a written change to who gets paid, and proof that your state allows it. Your own license stays in your name; an entity set up only to receive compensation does nothing else.

Payments to a corporation, including an LLC taxed as an S corporation, generally need no Form 1099-NEC (instructions). If the brokerage keeps paying or reporting under your Social Security number after the switch, its records and the corporation's will not agree. Ask for corrected records before filing.

Does an S corporation change my QBI deduction or retirement contributions?

Yes, both. The regulations leave real estate agents and brokers out of the brokerage field of specified service businesses, whose deduction is cut off at higher incomes (26 CFR 1.199A-5). But reasonable compensation an S corporation pays you is not qualified business income (26 U.S.C. 199A), so your salary lowers the base for the deduction of up to 20% (IRS). At higher incomes a limit based on the W-2 wages the business pays and its property also applies, so the same salary can cut the deduction at one income and support it at another; see QBI for S corporation owners.

Retirement contributions come only from compensation. As a sole proprietor that is your earned income from self-employment; in an S corporation it is your W-2 salary, and distributions do not count (IRS). A lower salary means a lower contribution base.

What about agents on a team or with an assistant?

An S corporation that pays an assistant runs payroll for that employee alongside your own salary, and splits with other licensees are a licensing question before a tax one.

• Assistants. An employee of your corporation is on its payroll; a contractor it pays may need a 1099-NEC. A one-owner LLC with no election that hires an employee runs payroll under the LLC's own name and EIN (IRS). The IRS says receipts produced by non-owner employees can support distributions rather than wages, so staff can change what counts as your reasonable salary (IRS).
• Team splits. In Texas a sales agent may not pay a commission to anyone except through the sponsoring broker (TREC FAQ), so a split to another licensee generally runs through the brokerage, not your entity.
• Books and 1099s. For recording splits, desk fees and payments to team members, see bookkeeping for real estate agents. For a spouse or child on payroll, see paying family in an S corporation.

What are the traps?

• Paid to the entity before the state allows it. In Texas, a registered entity may receive nothing until the commission approves it. An unlicensed entity that has been taking commissions must stop until it is licensed, and the commission warns that disciplinary action is likely; that guidance predates the registration option (TREC).
• No salary. The IRS can treat distributions as wages and assess employment tax (IRS). If payroll never ran, see S corporation payroll never run.
• A redirected commission is not always the entity's income. Income a third party receives for you under your agreement is still your income (Publication 525). Where only you hold the license and the entity just receives payment on your direction, whose income the commission is depends on the contracts and facts. Publication 525 gives no rule written for real estate agents, so have the arrangement reviewed before you rely on it.
• Mixing accounts. The IRS cites a case where a shareholder's personal use of the company bank account led to employee treatment and employment tax (IRS), and California says an S corporation needs a separate bank account and records (FTB).
• December closings paid in January. A cash-method taxpayer reports income when it is received or made available to you without restriction (Publication 538), so a December closing paid in January usually lands in the new year, possibly after the entity or election starts. Settle in writing who earned each commission that straddles the change, and match the brokerage's records; see bookkeeping for real estate agents.

Example

These scenarios are illustrative and use US dollars. They show Social Security and Medicare tax only; income tax and the QBI deduction also change.

A Texas agent netting US$150,000

As a sole proprietor, her self-employment tax is about US$21,200 (US$150,000 × 92.35% × 15.3%). She forms an LLC before the year starts, registers it with the Texas Real Estate Commission to receive compensation, files Form 2553 by March 15 for a January 1 start, and gives the brokerage a new W-9. The corporation pays her a US$70,000 salary, assumed here to be what a comparable agent would be paid for her work. Because her own services produce every commission, the IRS's source-of-receipts test can call for a higher figure, and each US$10,000 added to the salary cuts the gap below by about US$1,500. Payroll tax on that salary is about US$10,700, half withheld from her and half paid by the corporation. That is about US$10,500 a year less than her self-employment tax, before costs. Payroll filings, the Form 1120-S, the yearly Texas franchise tax information report and any change in her income tax come out of that gap.

An agent with a one-owner LLC and no election

An agent netting US$90,000 forms a one-owner LLC and, where her state allows it, has commissions paid to it. She still files Schedule C and pays about US$12,700 of self-employment tax, the same as before. Her W-9 shows her own name and number, and the 1099-NEC stays in her name. If she is in California, the department's published position covers payment to her own corporation, not an LLC, so she confirms with it first; the LLC would also owe California's annual tax.

A new agent netting US$40,000

Her self-employment tax is about US$5,700. With an S election and even a US$30,000 salary, payroll tax would be about US$4,600, leaving about US$1,100 a year before costs. Payroll filings, a separate corporate return and any state fees can exceed that, so staying a sole proprietor may cost less until commissions grow.

Different for you?

• You already formed an LLC and are still on Schedule C, or a high-commission year raises the S question: check when an S election pays off and get business tax help to set up the election, payroll and the first Form 1120-S.
• Your brokerage asks for entity documents, or commissions already went to an entity your state had not approved: ask your state's real estate commission what it requires, and get business tax help to sort out which return those commissions belong on before the next one is paid.
• You elected S status but filed Schedule C: see S corporation reported on Schedule C.
• You missed the Form 2553 deadline: see late S corporation election relief.
• You need to set your salary: see S corporation owner salary.
• Your books mix commissions, splits and personal spending: see bookkeeping for real estate agents or get bookkeeping help to separate them before the first corporate return.
• You are a realtor in Canada: see professional corporations.