Being a real estate agent isn’t just about helping people buy and sell homes. It’s also about being a small business owner! You get to be in control, work flexible hours, and enjoy unlimited income potential. But you also have to keep track of your business income, expenses, and taxes.
Consider this your continuing education course on filing taxes after you earn your real estate license. Spoiler alert: it’s nothing like filing taxes as a salaried employee.
You Don’t Have an Employer to Withhold Your Taxes
As a real estate agent, you’re typically classified as an independent contractor rather than an employee. This means you are responsible for your own tax withholdings.
For employees, tax withholdings don’t require a second thought. Your employer takes your taxes out of your paycheck and sends the tax payments to the IRS for you. Then, at the beginning of each year, they send you a W-9 to show how much you earned and how much has been paid to the IRS on your behalf. Easy!
But when you’re your own boss, you have to do the tax payments yourself. Yes, you get your commission check from your broker, but your broker isn’t an employer, so they don’t have any responsibility to withhold taxes or submit regular tax payments to the IRS for you. You are solely responsible for making your tax payments.
Helpful tip: open a savings account used just for your own tax withholdings. Every time you get a commission check, immediately transfer the amount for taxes into this special savings account. That way, you won’t accidentally spend your tax money on living expenses or something else. You’ll have the cash available when it’s time to pay the taxman.
How Much to Set Aside for Taxes as a Real Estate Agent
So how much do you need to save for taxes when you’re a real estate agent? Well, you need to set aside enough to cover your federal income taxes due plus any state income taxes due (if you live in a state that has a state income tax) plus the self-employment tax.
Federal and State Income Taxes
Your income tax amounts will vary depending on your income levels. To calculate your federal income tax withholding, you’ll need to check the latest federal income tax brackets. Then check with your local state treasury department to find out how much to set aside for state income taxes.
Self-Employment Tax
Back when you were an employee, your employer also withheld Social Security and Medicare from your paycheck. But as a self-employed real estate agent, you have to make these payments on your own too. And you do this through the self-employment tax.
As of 2022, the self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare). The silver lining is that you’ll be able to deduct the employer-equivalent portion (6.2% for Social Security and 1.45% for Medicare).
When to Pay Your Taxes as a Real Estate Agent
Self-employed individuals, like yourself, are expected to pay taxes quarterly. The IRS likes to get their cut of income as it’s earned, not in one lump sum at tax season. So each quarter, the IRS collects tax payments from individuals that don’t have their taxes withheld by an employer. These payments have to be estimated because you can’t possibly know your total income or expense amounts for the year when you’re just in the first, second, or third quarters.
To help you estimate your income taxes, the IRS provides a worksheet. Form 1040-ES provides more details on calculating your estimated taxes and gives complete instructions for making your estimated tax payments each quarter.
Deadlines are:
1st payment - April 15
2nd payment - June 15
3rd payment - Sept. 15
4th payment - Jan. 18
Late payments are subject to penalties, so add these dates to your calendar.
What Can I Deduct as a Real Estate Agent?
As a business owner, you’re able to deduct most of your business expenses from your taxable income. So, instead of settling for the standard deduction, invest a little time in keeping track of your expenses and itemizing them on your annual tax returns.
Just remember, to legally deduct an expense, you need proof of payment. So keep invoices, receipts, and bank account statements just in case you’re ever audited by the IRS. Without backup documentation for your deductions, you could end up owing more taxes plus interest and penalties.
Make sure to hold on to your deduction docs for at least three years. An audit could come years after filing, and some deductions can be spread out over multiple tax seasons. You can also take advantage of the Protecting Americans from Tax Hikes (PATH) Act. With PATH, you can take the entire deduction of a large purchase all at once.
Good Business Practices to Make Tax Season Easier
If you’re already dreading tax season, there are things you can do now to make your life easier when April rolls around.
Set calendar alerts for your estimated tax payments.
Track your income and expenses carefully. Every time you get a commission check or pay a business expense, document it. Whether you use old-fashioned Excel sheets or fancy accounting software, your system is only as good as the data you enter.
Digitize your paper receipts. Shoeboxed is an app that’s amazingly good at helping users document, organize and store receipts. After scanning a receipt you can even label it as “deductible.” But the real reason Shoeboxed is a must for real estate agents is it doubles as a mileage tracker. Miles driven is one of the biggest deductions for agents that are on the go, but it’s also one of the most difficult to document.
You may also want to consider hiring a CPA to handle your annual tax filings and estimated tax payments. They can focus on handling your tax liability so you can focus on helping buyers and sellers! But, make no mistake, you’re still responsible for tracking all your income and expenses, documenting your deductions, and making your estimated tax payments on time.
No one ever said filing taxes as a real estate agent was easy. But for most of us, the fulfilling career path is well worth the hassle.