If the hot real estate markets led you into a career as a real estate agent this year, filing taxes may look a bit different than what you’ve done in the past. Below are a few things you should know about reporting your earnings, as well as deductions that could reduce your taxable income. If this is your first year filing real estate agent taxes, we recommend working with a tax professional to ensure you’ve properly represented all income and expenses.
How are real estate agents’ wages reported to the IRS?
Real estate agents are typically paid as independent contractors of a brokerage, as opposed to employees. Below are two the two different tax forms you may receive this spring:
- 1099 – If you receive a 1099-MISC, you are considered an independent contractor of the brokerage that you are working with. The brokerage commission split will depend on the agreement between you and the brokerage. You are responsible for paying all real estate self-employment taxes, either quarterly estimated or a lump sum at tax time. When filing taxes, you will use Schedule C to list your deductions and determine your taxable income based on the revenue reported on the 1099. You will then submit Form 1040 to summarize your taxable income from your calculations. In order to avoid penalties in future years, it may be advantageous for you to pay quarterly estimated taxes. A CPA can advise you of the amount to remit each quarter.
- W-2 – This is the less common form of income as a real estate agent. If you receive a W-2, you are considered an employee, and your employer will be withholding payroll taxes. You will file taxes just as you would with any other employer.
Common tax deductions for real estate agents
As a real estate agent, you might be seeing red with the mounting expenses required to run your business. However, the good news is that there are many tax-saving opportunities when reporting income as a real estate agent (or other forms of 1099 income). Tax deductions will reduce your taxable income, resulting in an overall reduction of taxes you owe. Below are some of the most common tax deductions that appear on the tax returns of real estate agents:
Home office expense
If you have a home office that is used exclusively for business, you are eligible to deduct associated expenses.
Whether it’s getting your name out there or promoting your newest listing, marketing expenses are fully deductible. Developing your logo, printing listing signs, business cards, fees from online portals, and other forms of advertising—they’re all deductible.
It’s no secret that real estate agents are glued to their phones. Communicating with buyers and sellers is a must, and those expenses are deductible—including your phone bill, internet, and video conferencing subscriptions.
Freelancers, subcontractors, and professional services
As business picks up, you’ll quickly realize you can’t do it all. Depending on the services provided by your brokerage, you may need to hire someone to create your marketing materials, assist with listings, represent you legally, or take care of your books. Fortunately, costs associated with hiring freelancers are deductible.
Licenses and renewal fees
Your real estate license, renewal fees, and some taxes are deductible as a business owner. Be sure to keep records of all fees that are directly related to your business.
If you use a vehicle solely for business purposes, then you are able to fully deduct the cost of operating the vehicle. If your vehicle is used both for business and personal use, costs associated with business use are deductible. Be sure to keep a detailed mileage log!
It’s common for real estate agents to offer thank you gifts to their clients. Gift expenses are deductible, with a $25 limit per client.
Don’t let your retirement savings fall behind, particularly if you’ve been accustomed to contributing to a 401(k) plan in a prior job. Retirement contributions can be a part of a powerful tax and financial planning strategy, as self-employed individuals can still make tax-deductible contributions within allowable limits.
Along with insurance premiums, out-of-pocket medical expenses are also deductible if they exceed a certain percentage of your income.
Note that if you received wages as an employee (W-2), you are not eligible for the above tax deductions. If you’re paid on a 1099, it is vital that you keep a record of all expenses in order to deduct them on your Schedule C. Our recommendation is to incorporate a cloud-based accounting app into your real estate business. The process of tracking expenses and reporting income is simplified and securely stored in the cloud, accessible at any time, from anywhere.
We have put together a comprehensive guide of the top small business tax deductions to help you get organized this tax season. In this guide, you will find small business tax tips, detailed examples, and strategies to tracking expenses, giving you a better understanding of how to take advantage of these tax savings.
If you’re feeling a bit overwhelmed and need assistance with real estate agent taxes, we would be glad to help. Please complete the form here to schedule a consultation with one of our experienced CPAs.