This article was updated on December 7, 2021.
As a local real estate agent, your job is chock full of demands pulling you every which way. That includes filing your income taxes each year - on time and accurately. For real estate agents, ensuring that taxes are filed properly can be tricky since you are typically treated by the IRS, for federal tax purposes, as a self-employed worker. Learn how to file taxes as a real estate agent and follow these tax tips so you can file with ease as a self employed individual.
The Path Act: The Nuances of Filing Taxes as a Real Estate Agent
In 2015, the Obama administration passed the Protecting Americans from Tax Hikes (PATH) Act, providing real estate agents and brokers—among others—further tax relief via business-related purchases.
The IRS changed Section 179 deductions, allowing you to instantly deduct all or a larger portion of work-related expenses. According to an example from Lofty Real Estate: “Since agents use their cars for showings, you can write off up to $25,000 for the price of a new car the year you purchased it.”
However, there are limits on what and how many deductible expenses you can have as a real estate professional, which is why it may be wise to consult with a tax professional come tax time.
How to File for Taxes as a Real Estate Agent
To file your taxes the right way this tax season, follow these steps:
Step 1: Gather Your Records
To start, you’ll need to have all of the relevant documents on hand. This is especially important if you’re trying to maximize your deductible income. You’ll need documents and copies of the following:
- Copies of your receipts
- Business earnings
- Business expense lists
- Deductions
Step 2: Determine Your Status: Are You Self-Employed or Employed?
The vast majority of real estate agents are considered to be self-employed, rather than an employee. This impacts how taxes will be paid. Here’s the difference:
- If you are an employee, your taxes are automatically withheld by your employer. That money is already subtracted from your earned wages and paid to the government. When you’re an employee, tax filings help to ensure that your employer has paid the correct amount in taxes out of your wages.
- If you are self-employed or an independent contractor, you’ll need to make quarterly tax payments, declaring your earnings throughout the year.
Filing Taxes as a Contractor or Self-Employed Real Estate Agent
When you’re a self-employed real estate agent, you’re responsible for filing a few more forms to ensure you’re paying the correct amount of taxes:
- 1099-MISC – The 1099-MISC is essentially the W-2 for self-employed real estate agents. Your broker will give you this form every year to indicate how much money you made working as an independent contractor.
- Form 1040 – This is your annual tax return form. You’ll use it to report individual income tax as well as a few other sections such as:
- Schedule SE will be used to help you calculate your self-employment taxes
- Schedule C will be used to calculate your net profit.
- Form 1040-ES – This form is actually a booklet that’s designed to help you estimate and pay your quarterly taxes.
- Your state’s income tax forms – Depending on what state you’re working in, you may have to fill out additional tax forms to help you understand what income tax you owe to the state as well as to the federal government. The only states that don’t have an income tax are:
- Alaska
- Florida
- Nevada
- South Dakota
- Texas
- Washington
- Wyoming
Step 3: File Your Taxes
For the filing itself, you can either hire an expert accountant or use tax software. One of the best tax software for real estate agents is Realtyzam. This powerful accounting platform is built specifically for real estate professionals. It uses advanced automation and streamlines processes so that accounting and tax filing can be handled quickly and accurately. Generating your quarterly or year-end tax report takes less than 10 seconds.
Step 4: Make Your Quarterly Tax Payments
Because you’re probably self-employed, you will be responsible for paying your own taxes in an accurate and timely manner every quarter on the following dates:
- January 15 – taxes due on income earned between September 1 and December 31 of the previous year
- April 15 – taxes due on income earned between January 1 and March 31
- June 15 – taxes due on income earned between April 1 and May 31
- September 15 – taxes due on income earned between June 1 and August 31
These payments include both your income taxes as well as Social Security and Medicare.
5 Tips for Filing Taxes as a Real Estate Agent
Now that you’ve familiarized yourself with how to file taxes as a real estate agent, take a look at these additional tips and tricks to help ensure a smooth filing as a real estate agent that is self employed:
Tip #1: Collect Your Materials and Forms Well Before Tax Day
Whether you’re an independent contractor or an employed real estate agent, it can help to obtain your tax materials and forms long before the filing deadline. Things can get pretty hectic during tax season for a real estate agent, so thinking ahead can make a big difference when filing dates roll around. You can also help smooth the process by:
- Taking pictures of your receipts and saving them to a folder on your phone as you incur expenses.
- Keeping your tax forms in a safe, consistent, and accessible place.
- Archiving copies of your previous filled-out tax forms so you can use them as reference for future filings.
Tip #2: Go Slow and Fill Out Your Forms Accurately
After you’ve gathered your forms, fill them out carefully. Double check your work for mistakes or errors. These could result in legal issues with the IRS. Things to check for:
- Errors – Common errors include:
- Miscalculations
- Misspellings (particularly for names)
- Missing or illegible name or address
- No signature or return date
- Not including relevant schedules
- Not including a postage stamp
- Forgetting to make the check payable to the US Treasury
- Wrong taxpayer ID number – If your taxpayer identification number is incorrect or absent, your taxes will be unable to be filed.
- Underpaying taxes – Underpayment on quarterly taxes can result in tax penalties.
- Underreporting – Failure to report all of your income can result in significant fines and penalties.
Tip #3: Include Allowable Deductions
As a real estate agent, you can deduct several expenditures related to your business activities.
It’s important that you don’t solely focus on large purchases. There are plenty of minor expenditures that can also be deducted, and which add up quickly. There are also deductions that aren’t directly related to your daily business, but are still considered allowable deductions by the IRS. For example, common deductions you should look into include:
-
Education – As a real estate agent, you need to stay current on the market and learn new strategies to help better service your clients. This can involve education. Real estate agent Dean Cacioppo advises adding education costs to your deductions. When it comes to his tax forms, he always includes:
-
Real estate training classes
-
Continuing education classes
-
Coaching
-
- Marketing assets – Any campaign materials you use to attract homeowners are allowable deductions. This includes business cards and mailers, open house signs, sale flyers, and more.
- Digital marketing and advertising – Whether it’s building a website or running digital or social ads, investments in your digital marketing are also deductible.
- Transportation – If you use a vehicle for work purposes, related expenses can be deducted. This includes:
- Maintenance
- Gas
- Mileage
- Insurance
- New car purchase
- Cost to lease
According to real estate tax expert and accountant Thomas Williams, “Many real estate agents leave money on the table when it comes to their mileage. Depending on where you work on a regular basis, the tax deduction may include attending meetings, putting up for-sale signs, running business-related errands, and completing floor time at your broker’s office.”
- Licensing – Renewal and licensing fees and MLS Multiple Listing Service and association dues are categorized as a work expense, and thus deductible.
- Utilities – Your internet, phone, and power bills all are necessary for you to be able to do your job—even if you’re now working from home, they are still likely to be deductible.
- Insurance – In all likelihood, you carry general liability and professional liability insurance to protect yourself from the inherent risks of interacting with third parties and providing professional advice. If you have your own policy—one not covered by your brokerage—you can deduct it.
- Home office expenses – Whether you rent or own a home, if you use a portion of that as an office space, you can write that off as well. How much depends on the square footage and usage of your office space.
- Work-related travel – Trips are a necessary part of serving your clients, seeing different properties, or attending conferences. If you have traveled for work or educational purposes, the related expenses are deductible. This includes airfare, lodging, meals, etc.
- Gifts – Gifts are limited to $25 per person per year. If the client is a couple, it’s $50 per couple per year. If you purchase a larger gift for an important client, be sure to only count $25 per person towards taxes.
Tip #4: Include Tax Credits
Depending on your total income, real estate agents may also be eligible for tax credits.
There are dozens of potential credits. What you choose will be contingent upon your financial and personal situation, and it is advisable to speak with a tax professional for guidance. That said, common tax credits you might consider include:
- Earned income tax credit – Do you make less than $55,000 per year? If so, you may qualify for a general credit to reduce the taxes you owe.
- Child tax credit – If you have kids, you may be able to qualify for up to $2,000 in tax credits per child.
- Dependent care – If you pay for child care or adult care, you can receive 20-35% off of $3,000 in total care costs.
- Saver's credit – If you paid into your retirement account you may qualify for a 10%, 20%, or 50% credit, depending on your income level. The credit is off of a maximum $2,000 in investments.
- Education credits – Do you have children in higher education? If so, there are tax credits up to $2,500 if you have students in graduate or undergrad programs.
For further resources on tax credits and general tax questions, real estate agents can consult the IRS’ Small Business and Self-Employed Tax Center.
Tip #5: Discover a Tax Expert Using Nextdoor
These days, it makes a lot of sense to hire a professional to help you wade through the mire of the American tax system. They can ensure that taxes are filed correctly and promptly and are able to maximize your available deductions and credits.
Need help finding the best tax professional near you? Start with Nextdoor. Claim your free Business Page and connect with local tax experts in your community. Nextdoor allows you to connect with a wide range of local services and professionals, including those who specialize in filing taxes for real estate agents. You can also use this page to highlight and promote your Real Estate business.
Taxes can sometimes be difficult, but these steps outlined above will help you navigate the process.
Sources:
IRS. PATH ACT Tax-Related Provisions. https://www.irs.gov/newsroom/path-act-tax-related-provisions
Lofty Real Estate. Real Estate Agent Tax Tips. https://www.loftyrealestate.com/agents/real-estate-agent-tax-tips-what-you-should-know/#:~:text=The%20PATH%20Act%20was%20established,into%20bigger%20savings%20on%20taxes.
Real Estate Express. 5 Tax Tips for Real Estate Agents. https://www.realestateexpress.com/career-hub/blog/tax-tips-for-real-estate-agents/
IRS. Earned Income Tax Credit. https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit-eitc
Realty Times. Tax Tips for Real Estate Agents and Brokers. https://realtytimes.com/advicefromtheexpert/item/1037475-tax-tips-for-real-estate-agents-and-brokers
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