Realtors - How to Report Real Estate Commissions as S Corp. Income

Realtors often hear of the advantages of operating as an S Corporation. Rather than consulting with an experienced tax professional, they form an S Corporation and report their realtor commissions and operating expenses on the corporate tax returnForm 1120S rather than on Schedule C in Form 1040. The motivation for doing this is often related to paying less in self-employment (SE) taxes. S corp. K-1 earnings are not subject to SE taxes; whereas Sch. C earnings pay the full 15.3% tax rate.

Unfortunately for the realtor, the IRS says they cannot do this and the courts agree with the IRS. There is an income tax doctrine called the “assignment of income”. In its simplest form, the courts have ruled that one taxpayer cannot assign its income to another taxpayer. For example, a parent cannot assign his income to a child in a lower tax bracket to reduce income taxes due. Even though the realtor may own 100% of the S Corporation and all of the corporation’s income and expenses flow through to the individual, the individual and the corporation are two different taxpayers.

In many states, the realtor’s license is governed by the Department of State and the license is awarded to the individual, not the corporation. Thus the income earned by the realtor is earned in his/her personal name, and not that of the corporation.

In PA, it would be improper for a realtor to create an S Corporation and report the commissions earned on the S Corp. The reporting of the commission income by the realtor on the corporate return than on his/her Form 1040 would be considered an assignment of income and not be allowed.

However, there is good news for PA realtors who wish to have their income reported on their S Corp’s Form 1120-S tax return rather than on Sch. C. PA Act 2009-14 (SB 241) was enacted which allows realtors, with the permission of their broker, to create a Qualified Association (QA) and the realtor’s commissions earned will be reported by the broker using the QA’s EIN rather than the individual’s SSN. This legislative fix allows PA realtors to report their commission income as S Corp. income and the realtors can enjoy the tax benefits of being an S Corp. owner.