How Much Should I Set Aside for Taxes as a Real Estate Agent?
As a real estate agent, you're in a unique position when it comes to taxes. You're not just an employee getting a regular paycheck with taxes already taken out. In most cases, you're responsible for paying them yourself. Which can make things a little...complicated.
If you've been wondering, "How much should I set aside for taxes as a real estate agent?", you'll find all of the answers you need in this blog post.
If you don't plan ahead, tax time can turn into a real headache. You might end up owing way more than you expected or even facing penalties for not paying enough throughout the year.
But don't worry! By the end of this article, you'll have a solid grasp on how to pay income taxes (and keep more of your hard-earned money).
How Real Estate Agents are Taxed
As a real estate agent, you're typically considered an independent contractor. This means that you're self-employed in the eyes of the IRS.
You don't have an employer to withhold taxes from your every paycheck, so it's your responsibility to make regular estimated tax payments.
Typically, you'll report all your income on your personal tax return (but it ultimately depends on your business structure - more on that later). This includes every commission check you receive, no matter how big or small.
Business Structures for Real Estate Agents
How you legally set up your business has a big impact on your taxes. Here are a few common options for real estate agents:
Sole Proprietorship: This is the simplest structure, and it's how most realtors start out. You'll report your business income and expenses on Schedule C of your personal tax return. The downside is that you're personally liable for any business debts or legal issues.
Limited Liability Company (LLC): An LLC offers personal asset protection (AKA, if your business gets sued, your personal assets are usually safe). For taxes, a single-member LLC is usually treated like a sole proprietorship. You can also choose to be taxed as an S Corporation, which might save you on self-employment taxes.
S-Corporation (S-Corp): Running your business as an S-Corp can help you save money on self-employment taxes. In this case, you pay yourself a "reasonable salary," which is subject to regular employment taxes. Any additional profit can be distributed as dividends, which aren't subject to self-employment tax.
So, which business structure is right for you? Well, it depends on a few things:
How much you're earning: Many real estate agents start out as sole proprietors, but as you earn more, an LLC or an S-Corp makes much more sense (and offers important protections).
How much complexity you can handle: S-Corps offer tax advantages, but they can be more complicated to run.
Your future plans: If you're planning to grow your business, hire, or bring on partners, an LLC or an S-Corp might be better long-term.
It's a good idea to consult with a tax professional to figure out what's best for you. They can look at your specific situation and help you make the right call.
Self-Employment Taxes
When you're an employee, your employer contributes to your Social Security and Medicare taxes. But as a self-employed real estate agent, you're responsible for paying the whole thing.
The self-employment tax rate is 15.3%. This includes 12.4% for Social Security and 2.9% for Medicare. You pay this on top of your regular income tax.
To calculate your self-employment tax, you'll use Schedule SE. This form helps you figure out how much you owe in self-employed taxes based on your earnings.
Income Tax Basics for Real Estate Agents
Your income tax is based on your taxable income, which is your total income minus deductions. The US has a progressive tax system, which means the more you earn, the higher your tax rate.
Here are the federal income tax rates and brackets from the IRS website:
2023 tax rates for a single taxpayer.
These rates are marginal. This means you don't pay the same rate on all your income.
For example, if you're in the 22% bracket, you're not paying 22% on every dollar you earn. You pay 10% on the first chunk, 12% on the next chunk, and so on.
Your goal is to estimate your annual taxable income and figure out which bracket you'll likely fall into. This helps you know roughly how much to set aside to pay income tax.
Tax Deductions for Real Estate Agents
Tax deductions are business expenses you can subtract from your income, which lowers your taxable income. And as a real estate agent, there are quite a few that you can qualify for:
Mileage: All those house showings add up. Keep track of your miles and deduct them.
Home office: If you have a dedicated space in your home for work, you can deduct a portion of your rent or mortgage.
Marketing and advertising: Business cards, website costs, social media - they're all deductible.
Professional development: Classes, conferences, and subscriptions to industry publications all count.
Office supplies and equipment: This can typically include your laptop, too.
Phone and internet: You can deduct a portion based on business use.
Licensing fees and dues: MLS fees and professional association dues are typically all deductible.
Tax deductions are awesome, but you need to keep good records to back up your claims. Make sure to save all of your receipts!
Tax Forms for Real Estate Agents
Here are the main tax forms you need to know about:
1099-NEC: This is what your broker uses to report your income to you and the IRS.
Schedule C: This is where you report your business income and expenses.
Schedule SE: Use this to calculate your self-employment tax.
Form 1040: This is your individual income tax return.
Form 1040-ES: To figure out and pay your quarterly taxes.
Filing taxes can feel overwhelming, so consider hiring a professional to do it for you.
Also, learn about how Desi Tax® helped a realtor save $9,811!
Quarterly Estimated Tax Payments
The IRS doesn't want to wait until April to get paid. If you expect to owe $1,000 or more in taxes for the year, you need to make quarterly payments.
Quarterly taxes are due on April 15, June 15, September 15, and January 15 of the following year.
To figure out how much to pay, you'll need to estimate your income for the year and calculate your expected tax bill. Then, divide that by four. You can use Form 1040-ES to help with this calculation.
State Income Tax
You may have to pay income taxes to your state, too. Every state has its own tax rules, and they can vary quite a bit.
Some states, like Florida and Texas, have no state income tax. Others, like California and New York, have pretty high rates. And then there are states with flat tax rates, where everyone pays the same percentage regardless of income.
If you work in multiple states (maybe you're licensed in neighboring states), things can get tricky.
You might need to file returns in each state where you earned income. It's a good idea to consult with a tax professional to make sure you're covering all your bases.
Common Tax Mistakes Real Estate Agents Make
Here are a few things real estate agents should avoid when it comes to state and federal taxes:
Underpaying estimated taxes: This can lead to penalties. It's better to slightly overpay than underpay (you'll get a refund).
Missing deductions: Keep good records so you don't miss out on tax deductions and keep more of your money.
Poor record-keeping: This is why bookkeeping for realtors is essential.
Not separating business expenses from personal expenses: Use a separate bank account and credit card for your business to make tracking easier.
Not saving enough for taxes: You want to have enough funds when it's time to file taxes.
And, most importantly, trying to do it all yourself. Taxes for real estate agents can be complicated and you shouldn't be afraid of seeking professional help.
How Much Should I Set Aside for Taxes as a Real Estate Agent?
So, how much should you actually set aside for taxes?
While everyone's situation is different, the general rule of thumb is to set aside 25-30% of your commission checks for taxes.
This should cover your federal income tax, self-employment tax, and possibly state taxes (depending on where you live).
If you're in a high tax bracket or live in a high-tax state, you might want to bump that up to 35-40%. But if you have a lot of deductions or live in a low-tax state, you might be able to set aside less.
It's always better to set aside too much than too little. If you end up overpaying, you'll get a refund. But if you underpay, you could face penalties.
FAQs
What Percent Should I Set Aside for Taxes?
A good starting point is to set aside 25-30% of your earnings for taxes. This chunk should typically cover your obligations to the IRS, including income tax, self-employment tax, and state taxes (if your state has them).
If you earn a lot, you might need to save more, maybe 35% or 40%. This is because you could be in a higher tax bracket. On the other hand, if you live in a state with no income tax or have many deductible business expenses, you might be able to save a bit less.
How to Keep Track of Taxes as a Realtor?
Keeping track of your taxes as a realtor can be straightforward with the right approach. First, separate your business and personal finances with dedicated bank accounts and credit cards. You can use accounting software like QuickBooks to track income, expenses, and estimate quarterly tax payments. It's also important to save all business-related receipts, either physically or using digital apps.
And, of course, set reminders for quarterly tax due dates (April 15, June 15, September 15, and January 15).
Can You Write Off Clothes as a Real Estate Agent?
The general rule is that you can't deduct the cost of everyday work attire, even if you only wear it for work. The IRS says that if you can wear the clothing outside of work, it's not deductible. That said, there are a few exceptions. Branded clothing with your real estate company's logo that you wouldn't wear in your personal life might be deductible. Protective gear for construction sites or fixer-uppers could be deductible, too.
Take Control of Your Taxes as a Real Estate Agent with Desi Tax®
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