Does my S-Corp need to give me a salary if all my workers are 1099 contractors?

Question

I have an S corp question. I have an accountant.

Scenario-- I own a real estate brokerage with 8 agents and I also still personally do residential sales. My agents are 1099'd as they are independent contractors. The brokerage makes money from brokering the agents and the brokerage makes a profit from the agents for these brokerage services.

Since I'm still a selling agent and those commissions aren't part of the income of the brokerage except for the portion of the commission that is owed to the brokerage (just like other agents in the company).

• How should the commissions on personal sales to myself be reported? 1099(like other agents in the office) or salary?
• Since agents aren't W-2'd and are 1099'd for their commission less what is paid to the brokerage--what would be considered the correct "salary" for the broker/owner on their own production?

Followup--should two different entities by formed...ie two corporations or a separate LLC or sole proprietor for the personal sales?

BTW--I've had different CPA's give differing viewpoints.

Answer 1

To me the answer to this question comes down to factors about your personal life, complexity, and the tax policy "du jour". I see four options:

You can take sales commissions as distributions, and this does not trigger social security taxes and is very un-complex provided that you solely own the brokerage (or is wholly owned by two people on the same tax return). The tax package produced by the brokerage probably already has the distribution forms produced. Getting the money is simple, just write yourself a check. Also if you want to retain some of those earnings.

You could just bonus yourself as a W-2 employee of the brokerage, which is reasonable. This is great if you want to raise your income for 401K or social security purposes. Also it is pretty simple and cost effective if you are already on the payroll. This is great if multiple people own the brokerage, you are looking for simple, and you don't mind paying a bit extra social security tax.

You can 1099 yourself as a sole proprietorship, but that would mean paying both sides of social security on that money and filling out a whole new schedule C. You cannot double claim expenses, that is write off expenses claimed on the brokerage and on this schedule C. I would avoid this option, as it seems to be complex and costly tax wise.

You can 1099 yourself as an S Corp. This would mean duplicating the organization of the brokerage, but could work very well in your favor. This you would own solely and you could give yourself a very generous benefits package. There would be no need to duplicate these benefits as you are the only employee. This the most complex option, will cost you some money to do so, but could be the best.

All told it is difficult to weight what option is best for you without knowing a lot of other personal details. Also do you want to be bogged down in managing various entities rather then selling real estate? I would think not.

Answer 2

Yes, you do need to give yourself a reasonable salary. The reason you need to give yourself a salary is so that you can pay payroll taxes (Social Security & Medicare).

Now, you might be thinking: “Well, my ‘employees’ are getting a 1099 with no payroll taxes. Why do I have to pay them?” The answer is that your ‘employees’ are not supposed to be dodging those taxes, either. If they are working as independent contractors and getting a 1099 from you, they are supposed to be paying self-employment tax, which replaces the payroll taxes.

If you do decide to issue a 1099 to yourself as a separate entity from your corporation, you’ll need to pay self-employment tax on that income.