I think we all can agree, filing taxes can be intimidating-- especially if you're a real estate agent. Throughout the year, realtors are constantly investing in their businesses. Whether it's marketing a listing, generating new leads, or driving from appointment to appointment-- these costs add up!
Not only do agents need to keep track of their spending, but they also need to account for the fact that taxes are not typically taken out of commission checks. All of these factors can make filing taxes seem daunting. However if you commit to staying organized and planning ahead, it is totally manageable. That is why we compiled a few tips to help you take control of this tax season!
Realtors are Self-Employed
Even if you work for a brokerage, almost all realtors are considered self-employed. As a self-employed worker, taxes are not taken out of your paycheck the way they would be if you were an employee of a company. This is the same with commission checks. According to the IRS, realtors operate their businesses as sole proprietors. This allows you to write off eligible expenses.
Deductions
Deductions, or write-offs can be a variety of things, however it must be within reason. To qualify as deductible, real estate business expenses must be ordinary and necessary, directly related to your business and a reasonable amount. IRS Publications 463 and 535 can help you determine whether a specific expense is tax deductible. Here are some of the most common realtor deductions:
Real Estate Fees (MLS annual fees, board dues, licensing renewal fees, brokerage fees, etc.)
Marketing (Signs, flyers, business cards, postcards, social media, website maintenance, etc.)
Education (Coaching, training events, etc.)
Travel (Car maintenance and repairs, gas, parking, etc.)
Gifts ($25 limit)
Be sure to keep records of your business transactions, and don’t throw away receipts! You will need documentation to deduct business-related expenses.
How do Realtors Pay Taxes?
While you may not be paying taxes on your commission checks, you will be making tax payments to cover things like social security and medicare. It is likely that you will also be expected to pay quarterly self-employment taxes in addition to your annual income taxes. Most experts suggest setting aside 30% of your gross income for taxes. They also recommend making quarterly payments, rather than once annually. This makes organizing your profits and expenses more manageable. According to the IRS, these are the estimated tax due dates:
4/15 (taxes due on income earned from 1/1 to 3/31)
6/15 (taxes due on income earned from 4/1 to 5/31)
9/15 (taxes due on income earned from 6/1 to 8/31)
1/15 (taxes due on income earned from 9/1 to 12/31)
What Should I do if I Need Help?
If all of this tax talk seems a little overwhelming, your best option is to find a CPA (Certified Public Accountant) who is well-versed in taxes for realtors. You might want to start by asking them the following questions:
What is their previous experience?
If not all of it, what percentage of their practice today is in real estate?
Do they offer tax planning, and what does that look like?
How much money should I set aside for taxes?
Are they available year-round? Or are they only free during tax season?
Can they help in creating new entities? (Structure such as LLC, S-Corp, C-Corp)
Any recommendations for accounting software?
What other services do they offer?
Would they be able to represent you at an IRS audit?
At the end of the day, whether you plan to file your taxes yourself, or you choose to find a real estate tax specialist-- the key is to have a plan in place!
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