Tax laws in the United States, at both a federal and state level are complex. For real estate agents staying in compliance with these laws and regulations requires expert advice. Headaches at the eleventh hour of tax season when filing deadlines are near can easily be avoided by taking the time to find the right professional for you.
Real estate agents are generally paid commissions on the sale or rental of property and are considered independent contractors. The key difference between an employee and an independent contractor is the amount of control a business exerts over the worker. Because agents are largely self-directed while they report to a broker or brokerage, they are not classified as employees. For tax purposes, real estate agents are considered self-employed and therefore a schedule C form on your personal tax return must be filed. Agents can write off deductions directly from income, but it gets more complicated by self-employment tax on any profits.
Doing your taxes yourself, or with a CPA that does not have experience with 1099 independent contractors, can be a mistake – costing you significant savings via deductions and other credits.
This article will focus on some considerations you should make when using a reliable accounting service.
Reason #1 – Tax Deductions
Some examples of tax deductibles every agent should know about and take advantage of: licenses and MLS fees, marketing costs, insurance, commissions paid to other agents, commission advances, education and training, home office expenses and travel expenses.
Reason #2 – Tax Liability
While the tax deductions listed above can save a lot of money, real estate agents have to be careful. Tax fraud and misfiling can result in future monetary and criminal problems. Paying for a professional to file your taxes may sound expensive but the benefits far outweigh the cost.
Reason #3 – Tax Flexibility
You should be using a limited liability company or similar entity. These entities are taxed on a pass-through basis, with the business profits or losses passed through to the owner’s personal tax return. Keeping proper books allows you to clearly define between business and personal expenses. And, if the entity meets certain IRS eligibility criteria, you can file an S corporation election. With S corporation tax treatment, only your employment wage, not profits, are not subject to the self-employment tax. Sounds complicated? It can be but it may save you significant money.
Reason #4 – Self-Directed Retirement Accounts
Are you missing out on building retirement accounts? Just because you are self-employed doesn’t mean you are out of options. Out of profits from your business, you can invest money in a number of options. These include Traditional and Roth IRAs, Solo 401(k)s, SEP IRAs, SIMPLE IRAs, and other defined benefit plans.
Reason #5 – Estimated Tax Payments
As an independent contractor, you are responsible for making your own estimated tax payments throughout the year. While W-2 salaried employees have taxes automatically withheld by their employers, for independent contractors this doesn’t happen. Making quarterly estimated tax payments during the year can help you avoid serious problems and penalties each April.
This list of reasons only scratches the surface on the advantages to proper tax management, bookkeeping, and filing. Seek out a professional today. And remember, you can always get information directly from the IRS, which has a tax tip guide specifically for real estate agents.