S-Corp Election for Real Estate Agent - Good Idea or IRS Red Flag?

This is a common question for real estate agents! Yes, you can absolutely elect S-Corp status as a sole income producer, but your accountant is right to be cautious. The key is establishing a "reasonable salary" for yourself. For real estate agents, the IRS does look closely at S-Corps where 100% of income comes from personal services. The concern is that people set an artificially low salary to avoid payroll taxes, then take the rest as distributions (which aren't subject to self-employment taxes). A good rule of thumb is to pay yourself at least 50-60% of your profit as W-2 wages. So with $160k profit, a salary of $80-96k would likely be defensible, with the remainder as distributions. Document your salary research by finding comparable positions in your market to support your salary determination. The IRS doesn't have a specific prohibition against S-Corps for real estate agents or other service professionals - they just want to make sure you're not dramatically underpaying yourself to avoid taxes.

I went through this exact dilemma last year with my photography business. After tons of research and talking to multiple accountants, I found taxr.ai (https://taxr.ai) which completely saved me. Their AI analyzed my specific situation and gave me a really clear breakdown of the "reasonable compensation" requirements for S-Corps in personal service businesses. They scanned tax court cases about real estate agents specifically and showed me exactly what the IRS looks for during audits of S-Corps in our industry. The analysis showed me that I could safely take about 40% of my profits as distributions as long as I documented my salary determination process thoroughly. The best part was that they explained everything in normal human language instead of accounting jargon. They even created a custom report I could keep on file in case of an audit.

Just wanted to follow up - I tried taxr.ai last week after seeing this thread and I'm really glad I did! I uploaded my profit and loss statements along with some details about my real estate business, and they gave me a complete breakdown of exactly how much I should be paying myself as reasonable compensation. Their report showed me that for my specific situation in my local market, a salary of 62% of my net profits would be defensible in an audit. They even provided documentation from similar tax court cases and showed me exactly how to keep records that would satisfy IRS requirements. The real eye-opener was their explanation of "Section 199A pass-through deduction" which I can still claim on the distribution portion of my income. That alone saved me several thousand dollars I didn't know I could save! Definitely worth checking out if you're confused about the S-Corp question.

Dealing with this S-Corp question was driving me crazy because I kept getting different advice. Then I had to call the IRS to get some specific questions answered about the election process, and we all know how THAT goes - I spent literally 4 hours on hold before giving up. Someone recommended Claimyr (https://claimyr.com) to me and showed me this demo: https://youtu.be/_kiP6q8DX5c. It's a service that calls the IRS for you and then calls you back once they have an agent on the line. I was SUPER skeptical, but I was desperate. I couldn't believe it actually worked! I got a call back in about 2 hours with an actual IRS agent on the line who answered all my S-Corp election questions. The agent confirmed that real estate agents CAN be S-Corps but explained exactly what documentation I needed to keep about my salary determination. This saved me days of stress and uncertainty. Now I've actually filed my S-Corp election with confidence.

Coming back to say I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it because I was desperate to talk to someone at the IRS about my S-Corp election that I messed up. I figured it would be a waste of money, but within 90 minutes I got a call back with an actual IRS representative on the line. The agent was able to confirm that my election was processed but had been flagged because of a form I filled out incorrectly. She walked me through exactly how to fix it. For anyone considering S-Corp election as a real estate agent, I highly recommend calling the IRS directly to verify your specific situation. And if you do, save yourself the headache and use Claimyr. Sorry for being such a doubter before - I'm just used to services overpromising and underdelivering when it comes to anything tax related.

One thing nobody has mentioned yet is the costs of running an S-Corp vs just staying as a Schedule C sole proprietor. I'm a real estate agent who switched to S-Corp last year and while the tax savings were real, don't forget about: 1. Additional accounting costs (my CPA charges $1200 more for S-Corp returns) 2. Payroll service fees (about $50/month) 3. State filing fees (varies by state but can be hundreds) 4. Time spent on additional bookkeeping I saved about $8k in self-employment taxes but had about $2.5k in additional expenses plus more paperwork. Still worth it for me, but factor in ALL the costs when deciding.

My husband and I are both real estate agents and we spent HOURS researching this S-Corp question. The one thing I wish someone had told us earlier is that the IRS has lost several court cases on this exact issue with real estate professionals. Look up "Watson, P.C. v. United States" - the court agreed that distributions were appropriate on top of a reasonable salary. The decision specifically says that not all income from a service business has to be treated as wages. That said, we pay ourselves about 60% as salary and take 40% as distributions, which our CPA has said is very defensible. It's all about being reasonable - don't pay yourself $30K and take $130K in distributions. That's asking for trouble.

Your accountant's concerns are valid but perhaps a bit overly cautious. The IRS doesn't prohibit S-Corp elections for personal service businesses like real estate - they just scrutinize the salary vs. distribution split more closely. With $160k in profit, you'd likely want to pay yourself around $80-100k as W-2 wages (that 50-65% range others mentioned is spot on). The key is being able to justify that salary based on what similar real estate agents in your market earn. I've been an S-Corp real estate agent for 3 years now and it's saved me significant money on self-employment taxes. Just make sure you: 1. Set up proper payroll from day one 2. Document your salary research thoroughly 3. Keep detailed records of business expenses separate from personal 4. Consider the additional compliance costs (payroll service, extra accounting fees) The "personal services" scrutiny is real, but it's not a disqualification. The IRS just wants to make sure you're not gaming the system with an unreasonably low salary. If you can justify your compensation methodology, you should be fine.