Lifepoint Financial Design – LifePoint Financial Services – Mike Metzger Financial Planning

If you’ve read or followed my guidance, you know that electing S Corporation (S Corp) filing status can be a huge game changer for real estate professionals. Especially, those making higher incomes! 

Why is this? Because, as an S Corp, you become an employee of the company and pay yourself a “reasonable salary”. The IRS has methods for determining what a “reasonable salary” is for your particular occupation, so it’s important to make sure you are not paying yourself too little. If done properly, the remaining income that you didn’t pay yourself through payroll will avoid self-employment income taxation (2022: 15.3%) and might even be able to be distributed to you as a tax-free distribution of basis in your company.

There are several critical components to this strategy that you want to make sure you have a CERTIFIED FINANCIAL PLANNER™ and CPA who specialize in working with real estate professionals. Having a “reasonable compensation” and tracking your company’s basis are details that these aforementioned professionals should help you with. 

In addition, there are some considerations that should be mentioned that the compensation component can affect. 

The following are 3 considerations that you need to make before implementing the S Corp status:

1. Retirement Plan Contributions

Most real estate professionals who are self-employed utilize a SEP Ira retirement plan. With good reason, too. The SEP Ira is a fantastic way to put A LOT of money away towards retirement. In 2022, that contribution maximum limit is $61k.  

But, what is even better about the SEP Ira, is that contribution minimizes your income in that year, which reduces down the amount of taxes that you will owe. On top of that, you can invest those dollars and make money in the account, while deferring any capital gains taxation!

However, a detail in the contribution rules that most people forget about is that part of the maximum contribution is tied to what you make as an employee. 

Employee Contribution (Self-Employed)
The lesser of
20% of annual compensation 

$61,000 (2022)

Employer Matching Contribution
The lesser of
25% of annual compensation 

$61,000 (2022)

So, this means that if you want to make the maximum contribution to your retirement plan using a SEP Ira, you have to be very strategic in the payroll income that you take as an S Corp. It’s really important to discuss with your CERTIFIED FINANCIAL PLANNER™, the right salary to take for your specific needs and situation.

A potential solution is the Solo 401(k) for self-employed individuals, because you are not limited on the employee side to a 20% of annual compensation contribution. Rather, you can put in $20,500 (2022), so long as you have income exceeding that amount.

2. Qualifying for Additional Real Estate Loans

If you are reading this, you likely have real estate investments or are wanting to pursue real estate investments. Another consideration to the S Corp strategy is qualifying for additional real estate loans.

When you are wanting to take out a real estate loan, the mortgage company is going to use your tax returns to determine your debt-to-income ratio, as well as your ability to pay current and future debt obligations. 

With that being said, the S Corp strategy is all about reducing your tax exposure. So, the portion of your business income that you took out tax-free as a distribution of basis in the company does not show up on your tax return. The only income that is reported, it the “reasonable compensation” that you paid yourself through payroll.

So, if your business made $300,000 and you took $200,000 as a tax-free basis distribution and $100,000 as your salary through payroll, then you only made $100,000 to qualify for your next mortgage loan.

It’s important to work with a CERTIFIED FINANCIAL PLANNER™ to find the right income balance specific to your needs.

3. Tax Credits and Phase Outs

On the flip side of the coin, you want to make sure you consider the right income level to qualify for various tax credits and phase outs.

The IRS allows certain tax advantaged incentives for those making income below certain thresholds. Some of these tools are pretty powerful in your financial planning. Below is a non-comprehensive list of some of those to keep track of:

  • ROTH Ira contributions

  • Traditional/Spousal Ira contributions

  • Child Tax Credit

  • American Opportunity Tax Credit

  • Lifetime Learning Credit

  • Federal Income Tax Brackets

So, as you can see, its not just making sure your income is high enough. You also need to make sure you consider all the effects of your “reasonable compensation”.

Bottom Line: 

The S Corp strategy can be huge for self-employed business owners in the way of tax savings. But, don’t just assume making your income as low as possible is always the best move. There are many factors to be considered and really takes the assistance of a qualified professional. The right financial partner will work with you each year by taking in all of these considerations for your specific goals and needs.

If you want to explore working with Lifepoint Financial Design, 


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal.  Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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