Paying taxes as a real estate agent can be complicated when you’re first starting out. Even if you work for a brokerage or agency, you’re usually still not considered an employee. Generally, you’re an independent agent or broker working with the firm and being paid on commission – rather than through a regular paycheck. For tax purposes, that means you’re self-employed. Congrats!
The good news is that the rules are pretty clear for self-employed taxes. You don’t have a bunch of realtor-specific rules to figure out. The tricky part, if you’re new to self-employment? Figuring out those rules.
This tax guide lays out everything you need to know to file and pay taxes as a real estate agent, including:
- How to keep your finances straight all year long
- Which tax deductions you can qualify for
- How to keep your tax bill as low as possible
After all, everyone loves a little savings!
Real estate agent tax basics
Because you’re not an employee of your real estate brokerage firm or agency, the IRS (and, likely, your state and local tax agencies) consider you self-employed as an independent contractor.
Being self-employed means a few key things for your taxes as a real estate agent:
- You owe what’s commonly called the “self-employment tax,” which refers to the Social Security and Medicare taxes normally deducted from payroll for employees. That’s on top of your annual income tax.
- You’re required to pay estimated quarterly taxes four times a year to the IRS, and – if your state collects income tax – you should make regular estimated tax payments to your state throughout the year, as well.
- You might be eligible for tax breaks that apply to small businesses, like deductions for business-related expenses and tax credits like those extended to businesses during the 2020 economic crisis.
In case you’re not glued to news about tax policy, here’s a little secret: Tax laws tend to change quite a bit. Especially as a Business-of-One!
Those changes could significantly impact how much you owe in taxes – and which deductions and credits you can claim.
No one expects you to become a tax expert, though. We just recommend consulting with an accountant at least once a year to get up to speed. They’ll help you file at tax time, plus make a plan for the coming year so you can keep your books in order and budget for taxes before they’re due.
S Corp vs. Sole Proprietorship
How you pay taxes as a real estate agent (or any Business-of-One) depends on how your business is structured legally. And how you elect to be treated by the IRS.
If you haven’t taken any actions on the legal structure of your business, you’re a sole proprietor. In the eyes of the law and the IRS, that means you and your business are one and the same. You get paid by clients or firms, and you pay income taxes and self-employment tax on the amount you earn.
If you’ve organized your business as an LLC, you can get different tax treatment. By default, the IRS treats you like the sole proprietorship described above. But you can file a form to elect S Corp treatment, which basically gives you a little more separation from the business and comes with a tax savings. benefit.
When you’re an LLC taxed as an S Corp, you don’t owe self-employment taxes on your full income. Instead, you pay yourself a salary like you’d earn from a job, and you only pay the tax on that portion. The rest of the money you make for the year is treated as profit, and you only have to pay income tax on that portion.
Translation: You save 15.3% in taxes on a chunk of your income.
Real estate agent tax deductions
Here’s the fun part of running your own business: all those dollars you don’t have to pay taxes on! As a real estate agent, you’re eligible to claim these tax deductions:
● Advertising costs
● Auto travel and expenses (in miles)
● Office cleaning and maintenance.
● Commissions paid
● Insurance premiums
● Legal services
● Professional services (e.g. accountant, assistant or marketing firm)
● Management fees
● Bank fees and loan interest
● Office supplies, equipment and repairs
● Office utilities
These could change over time. To get the latest list of self-employment deductions you might be able to claim, grab the IRS Schedule E.
Real estate agent tax preparation tips
Clean bookkeeping is key to your happiness – and your accountant’s – at tax time. Follow these tips to avoid common self-employed tax mistakes and reap the rewards when you file your taxes.
Keep personal and business finances separate
Whether you’re a sole proprietor or an S Corp, keeping your business income and spending separate from your personal bank accounts keeps your books tidy and makes expense tracking and tax filing easy. Open a separate bank account and credit card just for your business.
Back up your records
Most self-employed people rely on bookkeeping software to track income and expenses. If that’s the only place your information lives, you’re out of luck if it crashes or you can’t access the account online. Download your records regularly, and store them in a safe physical or electronic folder to make sure you can get to them when you need them.
Track expenses individually
To properly claim deductions on your taxes and withstand an audit, you should have a record of individual expenses (with receipts!). Don’t just tally everything in a lump sum to claim as “expenses” at tax time.
Pay your quarterly taxes
Estimated tax payments are due for your business to the IRS every April 15, June 15, September 15 and January 15 (if any of these days fall on a weekend or holiday, your payments are due on the next business day). If you don’t pay them, you’ll owe a full year’s taxes come tax time plus fees for late payment. Ask your accountant about your state’s requirements for estimated payments.
Track your expenses throughout the year.
Get familiar with self-employed tax deductions, and track your expenses all year long along with receipts.
Work with experts
You might not need to hire a dedicated bookkeeper or accountant for your business year-round. But consulting an expert periodically will help you make sure your books are in good shape when it’s time to file taxes.
Expense tracking for real estate agents
Depending on how complicated your business is, you have a few options for tracking expenses.
Many people default to bookkeeping software. Those programs are great, but they might actually be more complex than you need (and, therefore, more money than you need to spend).
If your business is pretty simple, you could just track your expenses in a basic spreadsheet through Excel or Google Sheets.
To make sure you’re capturing everything you need, here’s a simple template you can use:
Real Estate Agent Expense Spreadsheet
How to reduce taxes as a real estate agent
These simple steps could help you save big on taxes as a real estate agent:
● Form an S Corp
● Track your expenses
● Save for retirement
Form an S Corp
Here’s the deal with S Corp taxes: You save money by paying yourself a salary and avoiding self-employment tax on a portion of your business income.
The caveat is that you have to pay yourself what the IRS considers a reasonable salary, which is generally what you could expect to earn if you were doing your job as an employee. Basically, the IRS won’t let you use an S Corp as a loophole to pay yourself a tiny salary to avoid a bunch of taxes.
That means forming an LLC to be taxed as an S Corp is most beneficial if you expect your business earnings in a year to be more than the reasonable salary for your job.
If you bring in less than a typical salary, forming an S Corp would probably be more paperwork and expense than it’d be worth for your business right now.
Track your expenses
As a real estate agent, you’re eligible to deduct a lot of expenses from your taxable income – which means a lower tax bill and maybe even a lower tax bracket! The more expenses you can claim, the more tax savings you’ll see.
But you can only claim those expenses if you keep track of them. Use your bookkeeping software or the spreadsheet we shared above to keep careful track of every eligible expense and its receipt throughout the year, so you don’t miss anything at tax time.
Save for retirement
When you’re self-employed, you miss out on several employment benefits, including employer-sponsored retirement plans. You’re responsible for planning for your own financial future.
That might feel like a burden, but it comes with a tax perk.
Contributions to a traditional IRA (individual retirement account), SEP 401(k) or other eligible retirement account are tax deductible. Depending on what kind of account you open, you could sock away tens of thousands of dollars each year and deduct the amount from your taxable income.
A financial planner can help you determine an optimal amount to contribute to retirement to balance tax benefits and future savings with your current financial needs.
FAQs about real estate agent taxes
Can real estate agents write off clothing?
Generally, you probably can’t deduct your clothing as a business expense as a real estate agent, but there are exceptions. To deduct clothing, it must be required to do your job and not suitable to wear outside your business. The IRS sees things like nurse’s uniforms and clothing with the company logo as deductible expenses, but not a normal business suit or blouse. If you were required to purchase and wear shirts with the company logo, those would be tax deductible.
Can you deduct real estate agent fees on taxes?
Yes, fees you pay to register as a real estate agent, plus any continuing education costs, are tax deductible.
Can I write off my car as a real estate agent?
You can deduct the cost of gas and wear and tear on your car as a real estate agent. You claim the expense in miles traveled for work, and you can claim both local travel for showings and longer travel for business trips. The IRS pays a standard mileage rate for business travel, which is 58.5 cents per mile in the first six months of 2022 and 62.5 cents per mile in the last six months of 2022. In 2023, the rate is 65.5 cents per mile.
How much does commission get taxed?
Commissions you’re paid as a real estate agent are taxed like any self-employment income. You’ll owe 15.3% self-employment tax plus your income tax rate, which is based on your tax bracket determined by how much you earn. If you’re a single-member LLC taxed as an S Corp, you may pay yourself a salary and claim a portion of your income as business profits. In that case, the profit portion isn’t subject to the 15.3% self-employment tax.
What percentage of income should be set aside for taxes as a real estate agent?
The tax rate you pay depends on the amount of your taxable income. Your taxable income is any income you earn minus deductions you’re eligible to claim. If you’re just getting started, your income and expenses might be tough to predict, but the IRS tries to help you figure it out with Form 1040-ES.
An accountant can also help you create a personalized tax plan for the year. The two main numbers you need to know are the self-employment tax rate, which is 15.3%, and the income tax rate, which is between 10% and 37% depending on your taxable income. You’ll also be responsible for income tax your state collects.
How do real estate agents file and pay taxes?
Real estate agents who are brokers with a firm, rather than employees, are taxed as sole proprietors or S Corps, depending on how your business is organized. In any case, the IRS considers you self-employed. You’ll owe the self-employment tax, be required to pay estimated quarterly taxes and be entitled to business-related tax deductions. If you’re a sole proprietor, you file taxes using an individual Form 1040. If you’re an S Corp, you use Form 1120S. In either case, an accountant or tax software can make the process much smoother for you.
TL;DR: Self-employed taxes for real estate agents
As a real estate agent, you’re generally self-employed, even if you work under the roof of a brokerage firm. That comes with all the responsibilities of running a business-of-one, including the way you file and pay taxes.
Keep track of your business income and expenses throughout the year to make tax filing a smooth process, and consult an accountant periodically to stay on top of policy changes that could affect your tax bill.