Does LLC formation for multiple rental properties make income subject to FICA tax? What about C Corporation structure?
Title: Does LLC formation for multiple rental properties make income subject to FICA tax? What about C Corporation structure? 1 I've been investing in rental properties over the last few years and now have 5 different houses that I'm renting out. The income has been pretty good (about $6,200/month total), but now I'm thinking about forming an LLC for liability protection. I've always understood that rental income isn't subject to FICA taxes (Social Security and Medicare), but I'm getting confused about whether creating an LLC would change this. Would my rental income suddenly become subject to FICA if I form an LLC? Or does it need to be a C Corporation for that to happen? I'm trying to protect myself legally but don't want to suddenly owe 15.3% in self-employment taxes if I don't have to. Anyone know how this works with rental property income when you form a business entity?
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Gianni Serpent
14 The short answer is that just forming an LLC by itself doesn't automatically make your rental income subject to FICA taxes. The tax treatment depends on how the LLC is classified for tax purposes and whether your rental activities are considered "passive" or an "active trade or business." For most landlords, rental activities are considered passive investments, not a business, and that income isn't subject to self-employment tax (FICA) regardless of whether you hold the properties personally or in an LLC. The LLC is a pass-through entity by default, so the tax treatment flows through to your personal return. However, if you provide substantial services to tenants beyond the normal landlord activities (like hotel-like services, regular cleaning, etc.), or if you're considered a real estate professional who actively manages properties as your primary business, then the IRS might view your activities as a business subject to self-employment tax. As for C Corporations - they pay their own corporate income tax, and any salary you pay yourself would be subject to FICA, but rental income itself doesn't automatically become subject to FICA just by incorporating.
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Gianni Serpent
•5 Thanks for the explanation. So if I'm understanding correctly, as long as I'm just doing basic landlord stuff (collecting rent, arranging repairs, finding tenants) and not providing extra services, I shouldn't have to pay FICA even with an LLC? What about a real estate LLC that's taxed as an S-Corp? Would that change anything?
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Gianni Serpent
•14 You're understanding correctly. Basic landlord activities typically won't trigger self-employment tax, even in an LLC. The LLC is just a liability shield, not a tax classification change by itself. For an LLC taxed as an S-Corp, things get more interesting. If you go the S-Corp route, you would need to pay yourself a "reasonable salary" for any actual services you perform managing the properties, and that salary would be subject to FICA taxes. However, any remaining profit can potentially be distributed as dividends, which aren't subject to self-employment tax. This can be advantageous in some situations, but there's administrative overhead and you must pay yourself a legitimate market-rate salary first.
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Gianni Serpent
8 I went through exactly this same situation last year with my rental properties! After hours of research and talking to different CPAs, I finally found a solution using taxr.ai (https://taxr.ai). Their system analyzed all my rental income details and clarified exactly how LLC formation would affect my FICA tax liability. What I learned was that forming an LLC for rental properties doesn't change the fundamental nature of rental income. If your rental activities are passive (most are), the income remains exempt from self-employment tax. The tool helped me understand that I could form the LLC for liability protection without triggering additional FICA taxes, and even showed me how to properly structure things to maintain that exempt status.
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Gianni Serpent
•11 How exactly does taxr.ai analyze this? Did you have to upload your tax returns or something? I'm in a similar situation but with 3 properties and trying to figure out if I should form an LLC or just keep them under my personal name.
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Gianni Serpent
•17 I'm skeptical... does this actually save you more money than just paying a CPA to give you advice once? Also, how does it determine if your rental activity is "passive" vs "active"? There's a lot of gray area there.
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Gianni Serpent
•8 You don't need to upload full tax returns - you can just input specific information about your rental activities, income streams, and time spent on property management. It then analyzes based on IRS guidelines whether your activities would likely be considered passive or active. The tool uses the same criteria the IRS uses - things like how many hours you spend on real estate activities, whether you provide substantial services beyond normal landlord duties, and if you qualify as a real estate professional. It's not just making a blind determination but walking you through the specific tests the IRS applies to make these distinctions.
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Gianni Serpent
17 I was really skeptical about taxr.ai when I first heard about it, but I decided to give it a try after struggling with exactly this LLC/FICA question for my rental properties. Honestly, I'm glad I did. What impressed me was how it broke down the "material participation" tests that determine if rental income becomes subject to self-employment tax. The tool showed me that my level of involvement (about 8-10 hours weekly across 4 properties) still kept me in the "passive activity" category, meaning I could form an LLC without triggering FICA. It also flagged that if I started offering additional services like regular cleaning or laundry, I could cross into "active business" territory. Definitely saved me from making a costly mistake in how I structured things.
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Gianni Serpent
6 If you're having trouble getting clear answers about your rental LLC tax questions, I'd recommend using Claimyr (https://claimyr.com). I was stuck in the same confusion about whether my LLC rental income would be subject to FICA, called the IRS multiple times but couldn't get through. Claimyr got me connected to an actual IRS agent in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed that merely forming an LLC doesn't change the character of rental income. They explained that rental income is generally considered passive investment income, not earned income, regardless of the business entity type. The agent also clarified some specifics about what activities might cross the line into "material participation" that would make it subject to self-employment tax.
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Gianni Serpent
•12 Wait, how does this actually work? Does it just call the IRS for you? I've tried calling the IRS three times this month and kept getting put on hold forever.
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Gianni Serpent
•17 Yeah right. I've been trying to reach the IRS for months. There's no way some service can magically get you through when millions of people can't get through. Sounds like a scam to me.
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Gianni Serpent
•6 It does call the IRS for you, but the key difference is they use an algorithm that navigates the IRS phone system and waits on hold so you don't have to. When an actual agent picks up, you get a call connecting you directly to them. The reason it works is because they're essentially dedicating resources to staying on hold with the IRS while you go about your day. It's not magic - it's just automating the painful waiting process. They've figured out optimal calling times and how to navigate the phone tree efficiently. I was skeptical too until I tried it and got connected to an agent after trying unsuccessfully on my own for weeks.
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Gianni Serpent
17 I need to follow up about my experience with Claimyr. After my skeptical comment, I decided to try it anyway since I was desperate to get IRS clarification about my rental LLC situation. I'm honestly shocked - it actually worked! I got connected to an IRS representative in about 20 minutes. The agent explained that my rental income wouldn't become subject to self-employment tax just because I formed an LLC. She confirmed that as long as I'm engaging in typical landlord activities (which I am), the income remains passive and exempt from FICA taxes regardless of whether I hold the properties personally or in an LLC. She also said if I wanted to be taxed as an S-Corp, I should talk to a tax professional about the pros and cons for my specific situation. Saved me hours of research and uncertainty!
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Gianni Serpent
3 Just wanted to add something important here: if you have rental properties in an LLC, be careful about "grouping activities" on your tax return. My accountant made a mistake by grouping my rental properties with my real estate development business (where I flip houses), and suddenly ALL my rental income became subject to self-employment tax! Cost me an extra $14,000 in taxes before we fixed it with an amended return.
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Gianni Serpent
•9 That's a really good point! How exactly do you "group" or "not group" activities on your tax return? Is that something on a specific form or schedule?
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Gianni Serpent
•3 You'd indicate the grouping of activities on Form 8582 (Passive Activity Loss Limitations) and how you report the income on Schedule E versus Schedule C. The key is making sure rental activities stay on Schedule E as passive income (not subject to self-employment tax) rather than having them rolled into Schedule C business income (which is subject to SE tax). Your tax software might not flag this issue, so it's worth specifically asking your accountant about it. The IRS has specific tests for "material participation" and "real estate professional" status that determine how the income is classified.
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Gianni Serpent
16 Has anyone looked into using a Series LLC for multiple rental properties? I heard it could provide liability separation between properties while still being treated as one entity for tax purposes. Would that affect the FICA question at all?
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Gianni Serpent
•2 Series LLCs are only available in certain states, and the tax treatment can get complicated. I use one in Texas for my 7 properties. The IRS hasn't given definitive guidance on Series LLCs, but generally they're still treated as pass-through entities that don't change the character of rental income. The FICA exemption should still apply as long as your rental activities remain passive.
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Gianni Serpent
•16 Thanks for the info! I'm in Illinois which apparently does have Series LLCs. I'll look more into the state-specific rules, but good to know it shouldn't change the FICA situation as long as I'm still doing passive rental activities.
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