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Taxes

Real Estate Agent Taxes, Salaries & Commissions

Stephen Fishman
Tax expert and contributor MileIQ
May 6, 2019

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Most real estate agents are self-employed. That also means nobody is withholding earnings for the self-employment taxes.

Let's look at real estate agent taxes, salaries and commission.

What is an average real estate agent salary?

A real estate agent's salary will depend on a lot of things. The region you operate in, the market and your ability to source and close the client. The average real estate salary is $46,129, according to data from Payscale.

Of course, this lumps all the real estate salaries across the country. It also blends the pay for all levels of experience. The average pay based on experience level shows a bit more insight into what you can expect for this as a career:

  • Entry-Level (0-5 years): $43,000 per year
  • Mid-Career (5-10 years): $59,000 per year
  • Experienced (10-20 years): $62,000 per year
  • Late Career (more than 20 years): $75,000 per year

What are real estate commission rates?

A commission equal to 6% of the sales price of the property is common in many states. For example, if a home sells for $500,000, the commission would be $30,000. Yet, the actual commission rate can end up being higher or lower. The value of the property and the health of the real estate market factor into this.

Don't forget the first rule of real estate sales: just about everything is negotiable. The amount or rate of real estate commissions is not fixed by law. Any attempt to do so would be a violation of federal antitrust laws. Real estate agent commission is set by each broker individually. Often, these rates are negotiable between the seller and the broker.

The seller normally pays the real estate agent commission but this is negotiable. Sometimes, the buyer and seller split the commission.

A written listing agreement must specify the amount of the commission. This is paid to the agent's broker when escrow on the property is close. The broker then pays the agent.

In some cases, a single agent represents both buyer and seller. They receive the entire commission in this case. Other times, the buyer and seller each have their own agent. The real estate agent commission must be split between them and their brokers.

Real estate agent commission split between agent and broker

Real estate agents (also called salespersons or sales associates in some states) are the people who do most of the grunt work of selling real estate. They must work under the supervision of a licensed real estate broker. This is an individual (or company) with a real estate broker's license‚ a license much more difficult to obtain than an agent‚ license. Some brokers work independently. Many others are affiliated with a regional or national real estate franchise company.

Some brokers have many agents working under them, some just a few. Either way, real estate agents are ordinarily independent contractors, not employees of the brokers who supervise them. The vast majority of real estate brokers pay their agents by sharing commission from a sold property.

The amount of the commission split is subject to negotiation and should always be set forth in writing. A 50-50 split is common, but not universal. The amount depends on many factors, such as the level of services the broker provides the agent and the agent's sales track record.

Real estate agent taxes reporting

Since real estate agents are typically independent contractors, no taxes are withheld from their pay by the brokers for whom they work. Nor are their payments listed on any employment tax returns filed with the IRS.

Yet, the IRS still knows how much they are paid. Any broker who pays an agent $600 or more during the year must file IRS Form 1099-MISC with the IRS. The form is also filed with the applicable state tax agency. A copy is also sent to the agent.

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Automatic, accurate mileage reports.

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Real estate taxes paying your estimated taxes

Because real estate agents are typically independent contractors not subject to tax withholding, they are required to pay estimated taxes to the IRS. These are paid four times a year to cover both income taxes and self-employment taxes (Social Security and Medicare tax).

Because of estimated taxes, agents need to carefully budget their money. An agent who fails to set aside enough of his or her earnings to pay estimated taxes, could face a huge tax bill on April 15—and have a tough time coming up with the money to cover it.

Who must pay self-employment tax?

Estimated taxes must be paid by sole proprietors, partners in partnerships or members of limited liability companies who expect to owe at least $1,000 in federal tax for the year. C-corporations may also have to pay estimated taxes.

However, an agent who paid no taxes last year‚ for example, because his or her real estate business made no profit, doesn't have to pay any estimated tax this year no matter how much he or she earns.

How much in taxes do real estate agents have to pay?

Most people want to pay as little estimated tax as possible during the year so they can earn interest on their money instead of handing it over to the IRS. Yet, the IRS imposes penalties on those who don't pay enough estimated tax.

To avoid penalties, independent contractors must pay at least the smaller of:

  • 90 percent of their total tax due for the current year
  • 100 percent of the tax they paid the previous year or 110% if they're a high-income taxpayer

High-income taxpayers, those with adjusted gross income of more than $150,000 ($75,000 for married couples filing separate returns)‚ must pay 110 percent of their prior year's income tax.

The easiest way to calculate estimated taxes is to simply pay 100 percent of the total federal taxes paid last year, or 110 percent if a high-income taxpayer. This method can be used even by agents who weren't in business that year, but the return for the year must have been for a full 12-month period.

Other ways to calculate estimated taxes for real estate agents

There are two other ways to calculate the estimated tax that are more complicated, but might result in lower payments:

If you think your net income will be less this year than last year, you'll pay less estimated tax if you base your tax on your taxable income for the current year instead of basing it on last year's tax. The problem with using this method is that you must estimate your total income and deductions for the year to figure out how much to pay. Obviously, this can be difficult to compute accurately.

A much more complicated way to calculate your estimated taxes is to use the annualized income installment method. It requires that you separately calculate your tax liability at four points during the year, March 31, May 31, August 31 and December 31‚ prorating your deductions and personal exemptions.

You base your estimated tax payments on your actual tax liability for each quarter. This method is often the best choice for people who receive income very unevenly throughout the year. Using this method, they can pay little or no estimated tax for the quarters in which they earned little or no income.

Tax preparation software can help calculate estimated taxes. IRS Form 1040ES also contains worksheets to use.

Can you deduct clothing as a real estate agent?

Some real estate agents really dress to impress. But, can you write off the cost of that clothing? For the most part, no.

You can deduct clothing as a business expense if it's:

  • Required or essential in the taxpayer's employment
  • Not suitable for general or personal wear

Most of the clothes for real estate doesn't fit into this threshold.

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GET — On the App Store

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Most real estate agents are self-employed. That also means nobody is withholding earnings for the self-employment taxes.

Let's look at real estate agent taxes, salaries and commission.

What is an average real estate agent salary?

A real estate agent's salary will depend on a lot of things. The region you operate in, the market and your ability to source and close the client. The average real estate salary is $46,129, according to data from Payscale.

Of course, this lumps all the real estate salaries across the country. It also blends the pay for all levels of experience. The average pay based on experience level shows a bit more insight into what you can expect for this as a career:

  • Entry-Level (0-5 years): $43,000 per year
  • Mid-Career (5-10 years): $59,000 per year
  • Experienced (10-20 years): $62,000 per year
  • Late Career (more than 20 years): $75,000 per year

What are real estate commission rates?

A commission equal to 6% of the sales price of the property is common in many states. For example, if a home sells for $500,000, the commission would be $30,000. Yet, the actual commission rate can end up being higher or lower. The value of the property and the health of the real estate market factor into this.

Don't forget the first rule of real estate sales: just about everything is negotiable. The amount or rate of real estate commissions is not fixed by law. Any attempt to do so would be a violation of federal antitrust laws. Real estate agent commission is set by each broker individually. Often, these rates are negotiable between the seller and the broker.

The seller normally pays the real estate agent commission but this is negotiable. Sometimes, the buyer and seller split the commission.

A written listing agreement must specify the amount of the commission. This is paid to the agent's broker when escrow on the property is close. The broker then pays the agent.

In some cases, a single agent represents both buyer and seller. They receive the entire commission in this case. Other times, the buyer and seller each have their own agent. The real estate agent commission must be split between them and their brokers.

Real estate agent commission split between agent and broker

Real estate agents (also called salespersons or sales associates in some states) are the people who do most of the grunt work of selling real estate. They must work under the supervision of a licensed real estate broker. This is an individual (or company) with a real estate broker's license‚ a license much more difficult to obtain than an agent‚ license. Some brokers work independently. Many others are affiliated with a regional or national real estate franchise company.

Some brokers have many agents working under them, some just a few. Either way, real estate agents are ordinarily independent contractors, not employees of the brokers who supervise them. The vast majority of real estate brokers pay their agents by sharing commission from a sold property.

The amount of the commission split is subject to negotiation and should always be set forth in writing. A 50-50 split is common, but not universal. The amount depends on many factors, such as the level of services the broker provides the agent and the agent's sales track record.

Real estate agent taxes reporting

Since real estate agents are typically independent contractors, no taxes are withheld from their pay by the brokers for whom they work. Nor are their payments listed on any employment tax returns filed with the IRS.

Yet, the IRS still knows how much they are paid. Any broker who pays an agent $600 or more during the year must file IRS Form 1099-MISC with the IRS. The form is also filed with the applicable state tax agency. A copy is also sent to the agent.

Real estate taxes paying your estimated taxes

Because real estate agents are typically independent contractors not subject to tax withholding, they are required to pay estimated taxes to the IRS. These are paid four times a year to cover both income taxes and self-employment taxes (Social Security and Medicare tax).

Because of estimated taxes, agents need to carefully budget their money. An agent who fails to set aside enough of his or her earnings to pay estimated taxes, could face a huge tax bill on April 15—and have a tough time coming up with the money to cover it.

Who must pay self-employment tax?

Estimated taxes must be paid by sole proprietors, partners in partnerships or members of limited liability companies who expect to owe at least $1,000 in federal tax for the year. C-corporations may also have to pay estimated taxes.

However, an agent who paid no taxes last year‚ for example, because his or her real estate business made no profit, doesn't have to pay any estimated tax this year no matter how much he or she earns.

How much in taxes do real estate agents have to pay?

Most people want to pay as little estimated tax as possible during the year so they can earn interest on their money instead of handing it over to the IRS. Yet, the IRS imposes penalties on those who don't pay enough estimated tax.

To avoid penalties, independent contractors must pay at least the smaller of:

  • 90 percent of their total tax due for the current year
  • 100 percent of the tax they paid the previous year or 110% if they're a high-income taxpayer

High-income taxpayers, those with adjusted gross income of more than $150,000 ($75,000 for married couples filing separate returns)‚ must pay 110 percent of their prior year's income tax.

The easiest way to calculate estimated taxes is to simply pay 100 percent of the total federal taxes paid last year, or 110 percent if a high-income taxpayer. This method can be used even by agents who weren't in business that year, but the return for the year must have been for a full 12-month period.

Other ways to calculate estimated taxes for real estate agents

There are two other ways to calculate the estimated tax that are more complicated, but might result in lower payments:

If you think your net income will be less this year than last year, you'll pay less estimated tax if you base your tax on your taxable income for the current year instead of basing it on last year's tax. The problem with using this method is that you must estimate your total income and deductions for the year to figure out how much to pay. Obviously, this can be difficult to compute accurately.

A much more complicated way to calculate your estimated taxes is to use the annualized income installment method. It requires that you separately calculate your tax liability at four points during the year, March 31, May 31, August 31 and December 31‚ prorating your deductions and personal exemptions.

You base your estimated tax payments on your actual tax liability for each quarter. This method is often the best choice for people who receive income very unevenly throughout the year. Using this method, they can pay little or no estimated tax for the quarters in which they earned little or no income.

Tax preparation software can help calculate estimated taxes. IRS Form 1040ES also contains worksheets to use.

Can you deduct clothing as a real estate agent?

Some real estate agents really dress to impress. But, can you write off the cost of that clothing? For the most part, no.

You can deduct clothing as a business expense if it's:

  • Required or essential in the taxpayer's employment
  • Not suitable for general or personal wear

Most of the clothes for real estate doesn't fit into this threshold.

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