As you might have guessed, being self-employed has some great benefits as well as a few drawbacks. And one of the bigger negatives is the fact that as a self-employed person, you are paying more tax than a person who is an employee. In most cases, the employer is responsible for a portion of the tax liability or his or her employees. But the money that you are getting in paid in the form of rent from your tenants is technically not earned income, which is a big help to you where your tax liability is concerned.
Everyone who is a W2 employee and gets a pay stub can look at the FICA withholding from each check. This money is used to fund Social Security and Medicare and is known as the Federal Insurance Contributions Act. It is taxed at a rate of 15.3% of your earned income. The good news for employees is that the amount is split equally between the employee and his or her employer. So the employee only pays 7.65%. But when you are self-employed, you must pay all 15.3%. Fortunately, the majority of your income, the rent that is being paid to you is considered other income and not earned income, so you are not paying FICA on it.
This is just one of the many benefits of being a real estate investor and owning rental properties. But as with anything related to taxes and tax benefits, there is a great deal of fine print. It is always a smart choice to seek advice from a CPA or tax professional when you are deciding how to structure your real estate investment business. This will determine which benefits apply to you and your future earnings and income.
And as you may have already figured out, there is really a great deal that you need to learn to be successful in real estate investing. The only way that you will be able to learn the processes and the smartest way to operate your business, is to learn from a seasoned professional who has already mastered the process. Working with one of the team members at REI Squad is certain to launch your real estate investment business in the right direction.