In this video, Mark Kohler answers a real‑estate agent’s question about whether to operate as a sole‑proprietor/LLC or to elect S‑corporation status. He walks through a concrete example (gross $100k, $25k expenses, $75k net) and compares the tax impact of a traditional LLC (self‑employment tax of 15.3% plus income tax) with an S‑corp structure that splits income between W‑2 wages and K‑1 pass‑through. Using a typical 40% wage / 60% pass‑through split, he shows how the agent can save roughly 15% on payroll taxes, translating to about $7,500 on $50k of pass‑through income. Kohler discusses the “reasonable compensation” rule, noting his aggressive yet defensible benchmark and his firm’s willingness to cover penalties if audited. He then provides a rule‑of‑thumb: convert to an S‑corp when net earnings reach around $40k, where the tax savings offset the $800 annual filing cost. Finally, he advises keeping rental properties in separate LLCs distinct from the operating business, and mentions his daughter’s similar situation. The overall message is that most small‑business owners, including real‑estate agents, should start as a sole‑proprietor/LLC and switch to an S‑corp once earnings justify the payroll split.
Chapters
Matt says, as a real estate agent, should I be an LLC or move to an S corp? I own rentals and interest in other ownerships in businesses. Okay, this is great, everybody. Now let's keep the same diagram up here on the whiteboard. Matt says, I'm a real estate agent. So everybody, this is what our law, our tax attorneys go through on the phone with you. They go, okay, Matt's a real estate agent. Is that short term or long term income? Is that an asset that he's held and sold after 12 months? He is operating as a realtor. Now, he might have a W2 and Wade's Tables at night. He might have a W2 and be a stockbroker on the weekends. But he's a real estate agent for his business. Now this is important. Let's digress. Everybody out there, listen. No matter what type of business you are, landscaper, dentist, doctor, realtor, engineer, food truck, whatever. That's operational business. Now this is important. I could be a sole proprietor or an llc. Now that could be Matt. He's just a brand new LLC or sole proprietor. Or he's saying, should I be an S corp? Now let's compare the two apples to apples. Let's say Matt brings in $100,000. He spends 25 grand on expenses. Cell phone, travel, dining, home office, electronics, everything under the sun. And he has net income of 75. Okay, everybody, pretty straightforward. $100,000 of gross sales, $25,000 in expenses, and he net 75. Cool. Same in an S corp. Let's say we could recreate Matt's life in a vacuum and go, he made the same 75 grand net in an S corp or he did it in an LLC or sole prop. Now let's talk taxes. The first tax over here, self employment tax, 15.3%. That's FICA. The F word. FICA. Matt, you want to say what the FICA, I got to pay that. That's right. That's 10 grand. Then if Matt is in a state with state tax, he's got fed and state tax. Oh my gosh. Now if he, he could be like 25% with state and fed plus another 15, he could lose 40% of his income to taxes right out the gate. Now if Matt was an S corp, we take that same 75 grand and I a lot of times under 100 grand, we're going to do a 40, 60 split. Going to push 40% out as wages and 60% out. I'm sorry, let's do percentages here. I'm going to push out 40% as wages and 60% as K1 or pass through. Now, I know some of you that are accountants right now and attorneys are going, oh my gosh, that's totally aggressive. I would never do that. You've got to do reasonable compensation. And da da da. Guys go to every reasonable comp seminar every year. I read every case on reasonable comp. I've had IRS agents on my ex IRS agents because current employed agents won't come on my podcast. And we've talked about this for 20 years. I have never had a client audited for taking too low of a salary. Now, everybody's a little different. I'm just saying this is a benchmark. But you can be cautiously aggressive. And everybody out there, if you use my accounting firm and we peg your salary and you get audited, we pay the penalty. And that's what every accountant should do with their malpractice insurance. So back to the example. I net 75. Now this is important, everybody. I'm Matt, I'm a realtor. I made 75 grand after all my expenses. I either take it in the shorts and pay almost 40% in taxes, or I say, well, I'm going to take 25 grand in salary and 50 grand in net income. Do you have to wait around for a paycheck, Matt? Nope. We can do quarterly payroll reports. We can make it easy, schmeezy. Now look it. I just saved 15% on 50 grand. Approximately. There's some math here, a little bit here and there, but approximately 15% on 50 grand. I just saved $7,500. Now, I know you in California are like an LLC or an S Corp is $800 a year. Let me see. Spend 800, save 7,500. I think the math is in your favor. So the big question is, when should Matt convert from an LLC to an S corp? For everybody out there, whether you're a dentist, doctor, engineer, landscaper, or plumber, I want you to convert to an S corp when you're going to net around 40 grand. If you're going to net 40, then I could do a 50, 50 split. I could do 20 grand in K1 and 20 grand in W2. And I just saved you 15% on 20 grand. That's 3,000. Doing an S corp to save 3,000 is about break even to worth it in my book. So in summary, everybody, and I may have answered a number of questions for some of you watching already. When I have a new client that's just getting going, here's their trust at the bottom. We split it into short term and long term. And we start out as a sole proprietor and we convert to the S Corp when the time is right. And you may start out as an AS sole proprietor or LLC and convert to an S Corp. That's cool. We can do it retroactively to the beginning of the year if you're an llc. But over here is where we put our LLC for rentals. So if you saw that, Matt said, I've got rentals too. Whoa, Matt, your rentals go over here. Your operations go over here. So this is your 1099 from commissions and this is your rent from your rental. Now, I don't want all of you to feel like Matt got special treatment here. Taking a lot of time on his question. But this question, I can see it everywhere. How do I use the S Corp? Where do I put my rentals? So, Matt, get out there and kill it. My daughter Sydney is a realtor. She has an LLC I have not taxed as an S Corp yet. Hopefully this year's the year. If my daughter Sydney buys some raw land or some real estate and some rentals, we'll set up a separate LLC for that. Brother, sister, brother, sister. Bo.
