Before we discuss the advantages of forming a PA, you NEED TO KNOW the following:
As a Realtor, you are a BUSINESS OWNER.
The vast majority of Realtors are NOT employees of their brokerage firm which means, YOU ARE SELF EMPLOYED. As a self employed professional, you must consider what will make you and YOUR BUSINESS most profitable.
Here is the formula to calculate how profitable your Real Estate BUSINESS is:
PROFIT = COMMISSIONS – (EXPENSES AND TAXES)
Therefore, there are only THREE ways to INCREASE your BUSINESSES profitability.
1 – Increase the amount of commissions you earn.
2- Decrease your total expenses.
3- Decrease the amount of taxes you pay.
Most Realtors focus on #1 which of course makes sense as commissions = Income.
However, increasing your commissions may also increase your expenses (additional advertising, more driving etc)
** Realtors very rarely realize that they can LOWER the amount of taxes they pay! Yes, you read that correctly.
Let me explain: As a Self Employed Independent contractor (1099) – you must file a Schedule C. On your Schedule C, you claim your total 1099 income and all expenses associated with earning that income. The amount remaining is your BEFORE tax profit. Your Schedule C profit is now taxed TWICE!
First you are required to pay Self Employment tax of 15.3% on your profit.
Next you are required to pay Federal tax (at your personal tax rate)
By forming and operating your Real Estate business as a PA, you will no longer be required to pay Self Employment tax on all of your profit. Depending on how profitable your business is, this can equate to A LOT OF MONEY.
Why can you do this? Simple, you are no longer SELF EMPLOYED. You are now an employee of your PA. As an employee, you are required to take a reasonable salary, but it does NOT have to equate to all or even most of your business’s profits.
Generally, your company will pay LESS in taxes overall as a PA then if you are operating as a Self Employed non incorporated sole Proprietor.
In summation, as a BUSINESS OWNER, if your goal is to INCREASE your profitability, lowering your taxes is a sound strategy and therefore it is smart to form and operate your real estate business as a PA.