Payroll taxes, sales taxes, quarterly estimated income tax payments, payroll tax reports, unemployment insurance tax payments -- are you overwhelmed by tax and reporting obligations? If you're hollering, "Yes," take heart; you aren't alone. Most small business owners feel the same way.
As a real estate agent operating through a business structure like an S or a C Corporation, your biggest tax issues will be payroll and estimated quarterly income tax payments. If you operate through a Limited Liability Company you'll be making estimated quarterly income and self-employment tax payments instead.
Payroll taxes are made up of three parts: Income tax, Social Security and Medicare. You may also have state-level payroll taxes as well. How much income tax you withhold from each paycheck depends on the amount of your check, the length of the pay period and your deduction allowance. One of the nice things about being your own boss is you can decide how much to pay yourself and how often, and you can change it as you please.
Income tax is always paid by you personally and can't be written off by your business. It's deducted from your check and held by your business until it's time to pay it. That means keeping track of those amounts and making sure your business doesn't accidentally spend the money.
Medicare and Social Security taxes are calculated as percentages of your gross pay and withheld just like income tax. Medicare is a 2.9 percent tax while Social Security is 12.4 percent. You're only responsible for paying half of these amounts personally. The other half is paid for by your business, and is an allowable tax deduction.
Unemployment insurance premiums are deducted from each check and paid to your state each quarter. At the end of each year you will need to prepare a federal unemployment tax form recording all of the year's payments. If your state charges less than the federal rate, your business will have to make up the difference. Unemployment insurance premiums are a deductible business expense, and aren't deducted from your paycheck.
If your gross monthly salary is more than $3,500 per month, expect to pay your payroll taxes monthly. If your salary is less than $3,500 you'll only have to pay quarterly. State income tax payments will also be due -- check your individual state for the exact due dates.
That's payroll in a nutshell -- a very small nutshell for a very big subject. If you visit our website, taxloopholes.com/realestateagents , you'll find a free Tax Calendar download to help you. But the best way I know to deal with payroll is to either invest in an outside payroll service, a good payroll software package like QuickBooks, or a knowledgeable bookkeeper. You've got better things to do with your time!
Now let's take a quick look at estimated tax payments. The IRS doesn't want to have to wait until you file your tax return to collect your taxes, so it takes a look at what you owed the year before, estimates how much you'll make this year, divides that number by four and asks you to send them a check every three months.
The same logic applies to businesses. C Corporations make quarterly estimated payments unless their tax bill is $500 or less per year. If you operate through an S Corporation, you'll be making those quarterly payments personally. How much you'll have to pay depends on your salary to profit ratio: the more you take as salary, the less likely it is that you'll also have to make estimated tax payments.
If you operate as an LLC, you'll be making a combined estimated income and self-employment tax payment each quarter. Self-employment tax is currently 15.3 percent of your gross income, which is one reason to think about operating through an S Corporation instead. By splitting your income into payroll and profit distribution streams you can reduce the amount of payroll tax you pay.
And, if you're a "border shopper" who hops across state lines to take advantage of a neighboring state's lower tax rates, remember that use tax applies to your business-related purchases. Use tax is a "gotcha" tax that most states impose. It consists of the sales tax you would have paid on items had you bought them locally. Use tax is based on the honor system, meaning it's up to you to report it. But if you're business is audited, beware: State auditors will be specifically looking for this trick.
