For a real estate agent starting out fresh or otherwise, tax filing could be complicated as they generally work as independent agents or are employed with a firm on a commission basis. Even if you are working for a brokerage or agency, you are not considered an employee, noting that you may receive your payment through commissions made from successful deals.
Most real estate agents are termed independent contractors as they are legally considered self-employed. The status of real estate agents, whether they are self-employed or employed on a contractual basis by a firm, affects how you file your taxes. This distinction in recognition of a real estate agent’s employability comes with a few key differences in how income taxes are paid. With Line, America’s first Al-powered Smart Wallet App, you’ll be able to file your real estate taxes for free in a simple and affordable way.
From filing status to deductions, tax management may seem complicated. Here’s an easy guide to help you file taxes as a real estate agent:
What Are Real Estate Agent Taxes?
Unlike regular employees who have a portion of their salary withheld from their paychecks for income taxes, real estate agents have to pay a bunch of taxes related to their business. They pay a host of taxes such as sales tax, property tax, income tax municipal tax and other government fees.
Real estate agents are required to be extra certain about their taxes as they don’t work under an employer, who would ensure that they pay the appropriate amount to the government. In the case of regular employees, a portion of their wage is whisked away from the paycheck even before they see it. The employed worker just has to collect their bill with the US government while filing their annual tax returns.
The federal government sees any licensed real estate agent as self-employed if:
- The agent is paid directly for their services in making successful sales rather than hours worked on the job.
- An employer does not set aside taxes from the agent’s paycheck.
Real estate agents are considered to be sole proprietors as they don’t co-run their business with anyone else, don’t work for an employer and don’t incorporate any other business.
Do Real Estate Agents Pay Self-Employment Taxes?
Yes, a real estate agent or a broker is subject to Self-Employment Tax.
A self-employed real estate agent or a broker, considered to be an independent contractor and not an employee, is subject to the full 15.3% self-employment tax. A W-2 or traditional employee, on the other hand, pays 7.65% of the tax, while their employer pays the remaining 7.65%. Real estate agents are also required to pay an estimated quarterly tax four times a year to the IRS.
Interestingly, creating an S Corporation, a permitted business structure under the tax code, or forming a one-owner limited liability company (LLC) taxed as S Corp will allow you to hire yourself as a W-2 employee. You will then have to split your earnings between salary and distributions. By doing this, you will have to pay the 15.3% tax on the part of your salary part of the earnings, and not distributions.
Using this strategy, you’ll pay a tax for half your earnings. However, one of the pitfalls, once you implement this strategy, is that you will be considered a W-2 employee and will have to continue paying taxes as an employee.
Since real estate agents earn their money from a commission based on their sale performance, they are advised to categorize themselves under the Protecting Americans From Tax Hikes (PATH) Act while filing their taxes. The act provides sole proprietor businesses various tax reliefs through business-related purchases.
Do Real Estate Agents Pay Social Security and Medicare taxes?
Traditional employees have to pay social security and medicare taxes, which are withheld in their paychecks by their employers. However, for real estate agents working as independent contractors, their social security and medicare shares are covered in the Self-Employment Tax.
What Tax Forms Are Required By A Real Estate Agent?
Tax return forms for independent contractors are different than those for employees working with a designated organization. As a real estate agent, here are the different forms you will be using while filing your taxes in 2023:
Form 1099-MISC: This is a document to report your income as an independent employee. It is a self-employed tax form equivalent to the W-2.
Form 1040-ES: Through this form, you will have to report an estimated amount of your tax. This is a highly crucial form for self-employed persons to fill out while filing their taxes. This form covers any taxes that are not automatically withheld.
Form 1040: This is a standard annual tax return form for everyone reporting their individual income tax, but being self-employed, you will have to fill out a few additional schedules on this form, such as Schedule SE and Schedule C. These schedules help in calculating your self-employment taxes and your profit from the real estate business.
Deductions
There are various business-related grants that real estate agents can avail of to reduce their taxable income and increase their overall return.
- Education: A major part of your job is to stay updated with the latest trends and changes in the real estate market, which is influenced by a varied number of reasons. You can deduct any expenses in extending your education further to learn new strategies which would help you serve your clients.
- Business marketing: Any material like business cards, mailers, open house signage and flyers used to attract clients have been allowed deductions.
- Electronic and software: Deduct the amount you invested in electronics or software to grow your business. This can include laptops, computers, software purchases and phones.
- Advertising: Any expenses made to build a digital presence for your business through websites and running ads in digital marketing and advertising is deductible.
- Transportation: If you use a vehicle to commute to work, its expenses like maintenance, new vehicle purchases and lease cost among others are deductible.
- Licensing: You can make tax deductions of the costs of license renewal fees, licensing fees, Multiple Listing Services (MLS) and association fees.
- Gifts: With each client, you can avail of gifts worth $25 per year.
- Utilities: The money spent on any utilities required for your business are deductible. It can include the basic necessities of your job like internet, phone and power bills. These deductions are still applicable even if you work from home.
- Insurance: Any real estate agent who is covered with their own insurance policy can make the deduction.
- Work travel: Making routine trips is a necessary part of a real estate agent’s work. Whether you are visiting different properties or attending to your clients, any travel you make related to work is deductible.
Conclusion
With a host of loopholes, tricks and benefits, real estate agents are advised to hire tax professionals to effectively file their taxes and avail all the incentives provided to them. Hiring a certified public accountant (CPA) will help you reap all the right benefits in deductions and credits as you continue to focus on the complexities of the real estate industry. Note that real estate agents generally qualify for a wide range of deductions and they must keep a track of their deductions throughout the year to make filings stress-free.
