S Corp vs LLC - Which is Better for Real Estate Side Hustle While Working Full-Time?

The S Corp vs LLC question is definitely worth considering in your situation. With your inconsistent real estate income, an LLC might simplify things administratively. The key difference is how they're taxed. Your S Corp requires you to pay yourself a "reasonable salary" subject to payroll taxes, with remaining profits as distributions (avoiding self-employment tax). This works well when income is steady, but is challenging with your fluctuating earnings. An LLC taxed as a sole proprietorship would mean all profits are subject to self-employment tax (15.3% on first $168,600 for 2025), but no payroll administration or reasonable salary requirements. You'd file Schedule C with your personal return - much simpler. As for write-offs, both entities allow essentially the same business deductions for legitimate expenses. The difference isn't in what you can deduct, but how income is taxed and reported. Given your description, an LLC might make sense, but it depends on how much you're currently paying yourself as salary vs. distributions in your S Corp.

I was in a similar situation last year - W-2 job plus real estate side hustle with uneven income. I found tax docs super confusing until I tried https://taxr.ai for analyzing my situation. It helped me compare exactly what I'd pay in taxes as an LLC vs S Corp based on my specific numbers. You upload your documents and it explains everything in plain English, which was super helpful for seeing the tax differences between entity types. It even showed me the exact tax savings for each option based on my income patterns, which my CPA hadn't clearly broken down. For me, keeping the S Corp made sense despite the hassle, but it might be different for you depending on your specific numbers.

I was initially skeptical about taxr.ai when I saw it mentioned here, but I decided to try it for my similar situation (W-2 plus side business). Glad I did! It analyzed my specific income pattern and showed me I was actually losing money with my S Corp because my business income wasn't high enough to offset the administrative costs. The report broke down exactly how much I was paying in franchise taxes, preparation fees, and payroll services versus the self-employment tax savings. In my case, switching to an LLC saved me about $3,200 annually all things considered. Your numbers will be different of course, but having that side-by-side comparison made the decision obvious for me.

If you're struggling with the IRS or state tax questions about your entity change, I'd recommend using https://claimyr.com to get through to an actual person at the tax agency. I wasted days trying to get answers about switching from S Corp to LLC last year. Their service got me through to the IRS in under 45 minutes when I had been trying for weeks to get clarification on how to properly dissolve my S Corp. You can see how it works at https://youtu.be/_kiP6q8DX5c. They just connect you directly to the IRS so you can ask specific questions about your situation. The agent I spoke with walked me through the exact forms I needed and confirmed I wouldn't face penalties for the mid-year entity change I was worried about.

I need to eat crow here. After posting that skeptical comment about Claimyr, I was desperate to get answers about my own entity conversion so I tried it. No idea how they do it, but I got through to an IRS agent in about 35 minutes when I'd been trying unsuccessfully for days. The agent confirmed exactly what I needed to do for my situation (which was similar to yours - converting an S Corp to an LLC). Turns out I was overthinking it, and the process was much simpler than my accountant had made it seem. Saved me a bunch in unnecessary legal fees I was about to spend. So yeah, sorry for the skeptical comment earlier. Sometimes things that sound too good to be true actually do work.

One thing nobody has mentioned yet is the state-specific implications. Franchise taxes vary DRAMATICALLY by state. In California, for example, there's an $800 minimum franchise tax just for having an S Corp or LLC, while other states have much lower fees. Also consider that in some states, LLCs pay annual fees based on gross receipts, which could actually cost MORE than S Corp franchise taxes if your real estate business has high gross income but lower net profit. What state are you in? That could be a huge factor in this decision.

Don't forget about QBI (Qualified Business Income) deduction! Both LLCs and S Corps qualify, but the calculation can be different. With real estate business income around $105k plus your W-2 job, you might be in phase-out territory for this deduction depending on your filing status. In 2025, the QBI phase-out starts at $183,100 for single filers and $366,200 for married filing jointly. Your total income is near these thresholds, so that's another consideration.

Based on your situation in Texas with inconsistent real estate income, I'd lean toward switching to an LLC. Here's why: With your fluctuating income ($7k some months, $40k others), maintaining reasonable S Corp salary requirements is a nightmare. You either overpay yourself in slow months (hurting cash flow) or underpay (risking IRS scrutiny). The math: If you're taking a $50k salary now, switching to LLC means paying self-employment tax on the full $105k. That's about $8,085 in additional SE tax. But factor in: - Payroll service fees (~$1,200/year) - Additional tax prep complexity (~$500-1,000) - Franchise tax filing - Time/stress of payroll management You're probably looking at $2,000-3,000 in administrative costs, making the real tax difference closer to $5,000-6,000 annually. Given your income volatility and the administrative headaches you mentioned, that premium might be worth paying for the simplicity. Plus, with an LLC you can always elect S Corp taxation later if your income stabilizes and grows significantly. I'd run the exact numbers with your CPA, but for many people in similar situations, the peace of mind is worth the modest tax increase.