Are Real Estate Agents Sole Proprietors?

Many real estate agents begin their careers as sole proprietors, a status that arises automatically when they work as independent contractors. While this is the simplest way to start, the decision of how to structure a real estate business carries significant implications for both tax obligations and legal liability. Understanding these different paths is an important step in building a sustainable career.

The Default Status as a Sole Proprietor

For most real estate agents, operating as a sole proprietor is the starting point when working as an independent contractor. This business structure is established when a brokerage reports commission payments to the agent and the IRS on Form 1099-NEC, Nonemployee Compensation. This form documents all earnings and signals to the tax authorities that the agent is operating a business.

The primary tax consequence is the method of reporting income. All business activities are detailed on Schedule C, Profit or Loss from Business, which is filed as part of the agent’s personal Form 1040 tax return. The business has no separate tax identity from its owner, so every dollar of net profit flows directly to the agent’s personal return.

This net profit is subject to two forms of taxation. It is added to any other household income and taxed at the agent’s applicable individual income tax rates. The net profit is also subject to self-employment tax, calculated on Schedule SE, which is composed of a 12.4% Social Security tax and a 2.9% Medicare tax. For 2025, the Social Security tax applies only to the first $176,100 of net earnings, while the Medicare portion applies to all net earnings.

Alternative Business Structures for Agents

Agents have several other business structures to consider, and the choice depends on income level, risk tolerance, and long-term business goals. These alternatives can offer benefits related to liability and taxation.

A common first step away from a sole proprietorship is forming a Limited Liability Company (LLC). The principal advantage of an LLC is liability protection, as it creates a legal barrier between the agent’s personal assets and their business debts. For tax purposes, a single-member LLC is considered a “disregarded entity” by the IRS. This means its tax treatment is identical to a sole proprietorship, and the agent still reports business income and expenses on a Schedule C.

Another structure is the S Corporation (S Corp), which is a tax election made with the IRS. An agent can form an LLC and then elect for it to be taxed as an S Corp to achieve potential self-employment tax savings. Under this structure, the agent must be paid a “reasonable salary” as an employee, and this salary is subject to payroll taxes (FICA). Any remaining profits can then be paid out as distributions, which are not subject to self-employment taxes.

A C Corporation (C Corp) is another legal entity structure, but it is a less common choice for individual real estate agents. The primary reason is the issue of double taxation. The C Corp pays corporate income tax on its profits, and then if those profits are distributed to the owner as dividends, the owner pays personal income tax on that dividend income.

Forming an Entity and Making Tax Elections

Transitioning from a sole proprietor to a formal business entity involves state and federal procedures. The first step is gathering key information, including selecting a unique business name, appointing a registered agent to receive legal documents, and establishing a business address.

To create an LLC, the agent must file “Articles of Organization” with the appropriate state agency. This state-level action formally establishes the LLC as a legal entity. Once the state approves this filing, the LLC officially exists.

For agents seeking the tax advantages of an S Corp, the next action is to file Form 2553, Election by a Small Business Corporation, with the IRS. There are strict deadlines for this filing. For an existing entity, the form must be filed by the 15th day of the third month of the tax year, while a new business has a deadline of two months and 15 days from its formation date.

Ongoing Tax and Compliance Obligations

Operating under a formal business structure introduces ongoing responsibilities that are a trade-off for the liability protection and potential tax savings the structures provide. The choice of entity dictates the annual tax filing requirements an agent must manage.

For a sole proprietor or a single-member LLC taxed in its default status, the agent continues to file a Schedule C with their personal Form 1040. Estimated tax payments are typically made quarterly to cover both income and self-employment tax liabilities. The administrative burden is relatively low, as there is no separate business tax return to file.

The S Corporation structure imposes more complex compliance duties. The business is required to run formal payroll to pay the owner-employee’s reasonable salary. This involves withholding federal income tax, Social Security, and Medicare (FICA) taxes from the salary, and remitting these amounts, along with the employer’s matching portion of FICA taxes, to the IRS. The business must also file quarterly payroll tax returns, such as Form 941, and issue a Form W-2 to the owner-employee at year-end.

Furthermore, an S Corp must file its own separate informational tax return, Form 1120-S. The net profit or loss is then passed through to the owner via a Schedule K-1. The owner uses the information from both their W-2 and Schedule K-1 to complete their personal Form 1040, a multi-step process that contrasts with the single Schedule C filing.