For real estate agents, being responsible for your tax obligations is a key part of managing your income in the industry. Without the automatic withholdings traditional employees have, it’s up to you to ensure you’re saving the right amount for taxes.
A good rule of thumb? Set aside 25%–30% of your commission income.
This percentage accounts for federal income tax, state income tax (if applicable), and self-employment taxes, which include the employee and employer portions of Social Security and Medicare.
This approach helps you avoid a large tax bill at the end of the year and potential underpayment penalties. By setting aside a portion of each commission check and making regular payments, you can better manage your cash flow and reduce financial stress as tax season rolls around.
In this article, we cover:
- How your business or employment classification changes things
- Self-employment and other types of taxes to be aware of
- Deductions that can potentially help you pay less in taxes
Tax Responsibilities for Real Estate Agents
Real estate agents face unique tax obligations that differ from traditional employees. Knowing your employment classification, using the correct tax forms, and making estimated payments are all part of your tax responsibilities.
Classification as Self-Employed or Employed Agents
Most real estate agents are classified as independent contractors for tax purposes. That means you’re typically self-employed, even if you work with a brokerage. You’re responsible for setting aside funds to pay your own taxes.
Some agents may be classified as employees, though that’s less common. You’re an employed agent if you receive a regular paycheck with taxes withheld.
Self-employed agents must pay self-employment tax, which covers Social Security and Medicare contributions, also known as FICA. You need to allocate money for these taxes since those funds aren’t automatically withheld.
Essential Tax Forms and Schedules
The first form to familiarize yourself with is Form 1040 for your annual tax return. You must also complete Schedule C to report your business income and expenses from your real estate activities.
Schedule SE is used to calculate your self-employment tax. This form determines how much you owe for Social Security and Medicare.
Keep accurate records of all your income and expenses throughout the year. That helps make filling out these forms much easier at tax time.
If you’re an employed agent, you’ll receive a W-2 form from your employer. You’ll still use Form 1040 for your tax return, but you won’t need Schedule C or SE.
Estimating Quarterly Taxes for Real Estate Agents
Another requirement is to make estimated quarterly tax payments as a self-employed agent. These payments help you avoid a large tax bill and potential penalties at the end of the year.
Use Form 1040-ES to calculate and pay your estimated taxes. You’ll estimate your annual income and divide your tax liability by four.
Quarterly taxes are typically due on the following dates:
- April 15
- June 15
- September 15
- January 15 of the following year
Setting aside 25%–30% of your income for taxes is wise. This percentage may vary based on your income level and deductions. Consider working with a tax professional to determine the right amount for your situation.
Additional Tax Responsibilities for Real Estate Agents
Real estate agents face unique tax obligations beyond standard income tax. These include self-employment taxes and varying state and local tax requirements.
Self-Employment Taxes: Social Security and Medicare
You typically pay self-employment taxes, which cover Social Security and Medicare contributions. You’re responsible for both the employer and employee portions, totaling 15.3% of your net earnings.
Here’s the breakdown of that percentage:
- 12.4% for Social Security (up to the annual wage base limit)
- 2.9% for Medicare (no income limit)
For 2024, the Social Security wage base limit is $168,600. You pay the full 15.3% on earnings up to this amount. Above this threshold, you only pay the 2.9% Medicare tax.
It is crucial to allocate funds regularly to cover these taxes. Consider saving 25%–30% of your income to account for self-employment and income taxes combined.
State Income Tax and Local Tax Considerations
Your state income tax obligations can significantly add to your overall tax burden. Tax rates and structures vary widely between states.
These are some key points to remember:
- Some states have no income tax.
- Other states have flat rates or progressive tax brackets.
- A few states have special provisions for real estate professionals.
Check your state’s treasury department website for specific rates and rules. Don’t forget to look into local taxes, which may apply in some municipalities.
Quarterly estimated tax payments are often required for both state and federal taxes. Mark your calendar for these due dates to avoid penalties.
Consider working with a tax professional familiar with real estate agent taxes in your area. They can help you comply with complex state and local tax laws.
Tax Deductions and Business Expenses to Consider
One of the easiest ways to lighten your tax load as a real estate agent is by making the most of your deductions and keeping a close eye on your business expenses. Knowing where your money is going and understanding the basics of tax laws can go a long way.
Maximizing Deductions on Business-Related Expenses
You can deduct a surprising number of business-related expenses from your taxable income. Common deductions include advertising costs, auto expenses, and office maintenance. You can use the standard mileage rate for vehicle expenses or track actual costs.
Home office expenses are deductible if you use a portion of your home exclusively for work. That can include a percentage of your mortgage or rent, utilities, and insurance. You can also deduct office or desk fees that your brokerage might charge you.
Business cards, marketing materials, and technology costs like smartphones and computers used in your practice are also deductible. Be sure to include professional fees for accountants or lawyers.
Keeping Accurate Records
Maintaining good records may not be the most exciting part of your job, but it’s one of the most important. If you want to claim deductions and stay prepared in case of an audit, staying organized is key.
Start by opening a separate bank account and credit card for business expenses. It’ll make your life much easier when it’s time to sort out items for your tax return. Hold on to your receipts and invoices—seven years is a good rule of thumb.
And why not make the process even simpler? Use accounting software or apps to keep track of your income and expenses and pull up reports when you need them.
Take some time to review your expenses regularly, too. Doing so can help you catch deductions you might’ve missed. It’ll also give you a clear picture of your business’s financial health so you can make smarter decisions moving forward.
Investing in Professional Development
Expenses related to continuing education and professional development are tax-deductible. That includes costs for license renewal, industry subscriptions, and fees for coaching sessions.
Attending seminars and workshops can improve your prospecting and negotiating skills and knowledge while providing tax benefits. Keep records of all registration fees, travel expenses, and materials purchased for these events.
Consider joining professional organizations related to real estate, such as the Certified Residential Specialist (CRS) and the Accredited Buyer’s Representative (ABR), which are certifications offered through the National Association of Realtors (NAR).
These certifications demonstrate expertise and commitment to professional growth in specific areas of real estate, helping to increase your credibility with clients and marketability. Even better, membership dues are typically tax-deductible and can provide valuable networking opportunities and resources.