Each year real estate professionals must prepare for another tax season. In comparison to other professions, real estate agents and brokers require more documentation and extra legwork to ensure all business expenses are reported accurately on their federal tax returns. Because filing as self-employed can be complex, we’ve compiled this guide on how to file taxes as a real estate agent, along with some helpful tips & tricks on ways to make the process more seamless.
Your basic guide on how to file taxes as a real estate agent
The real estate industry offers a fun and exciting career for professionals of all ages. However, in between the house showings and weekly commission checks, there are a great deal of business expenses to keep track of. When tax season arrives, you’ll need all your ducks in a row to make the tax process a pleasant experience.
Figuring out deductions and overall tax management can be drawn out and complicated if you don’t know what you’re doing. Whether you have the assistance of a tax professional or plan on handling the task yourself, there are certain steps you need to understand in order to correctly file your tax form as a licensed real estate agent.
The first question you need to ask before getting started: Are you self-employed or an employee? What might seem like a simple answer to most is not always the case. Your status as a self-employed realtor means you can deduct qualifying business expenses on your return. On the contrary, employees, otherwise known as W-2 workers, are more restricted.
If your taxes are automatically withheld each paycheck by your employer, you fall under the employment category. If you receive payment for services (i.e. commission) and your employer does not take taxes out of your income, then you are categorized as self-employed.
Now that we’ve cleared that up — let’s get down to brass tacks. Because most real estate agents are paid commission and work on their own terms, they must front their own costs most of the time to land a sale. Fortunately, the IRS recognizes this line of action and offers deductible write-offs in turn.
Thanks to the Protecting Americans from Tax Hikes (PATH) Act, real estate agents and brokers have the option to receive greater tax relief on business-related expenses. To illustrate further, because real estate agents use their personal vehicle to drive clients to showings or meet with potential buyers, they are eligible to deduct nearly all car-related expenditures.
Of course, there is a catch! You have to maintain accurate records to back up any deductions you claim on your tax return.
To file your taxes correctly this tax season, follow the three simple steps below:
Step 1: Gather documentation
Grab your mileage log, receipts, and business-related invoices and have them on hand as you begin the process of filing your taxes. Although the IRS doesn’t require you to submit documentation, you will need this information to fill out specific parts of your tax form.
Step 2: Choose the right filing status
As noted above, one of the first things you’ll be asked is how you want to file. Since most real estate agents are self-employed, you’ll be required to fill out a few more forms than the average employee. The most important form you’ll complete is the 1099-NEC, formerly known as 1099-MISC.
- 1099-NEC (Where you’ll report non-employee compensation. In other terms, this is the W-2 for self-employed real estate agents)
- Form 1040 (Where you’ll report individual income, and calculate and claim deductions on your Schedule C)
- Form 1040-ES (Where you’ll figure out your estimated tax on income that is not subject to withholding)
- State income tax form (Must be filled out if you work in a state that requires you to pay state taxes on your income)
Step 3: File your taxes
You have two main options for filing for your annual return. You can hire an accountant or use an online tax software. Both have pros and cons, but ultimately the choice is up to you! With a licensed professional, you have the ability to sit face-to-face with a tax expert and can ask as many questions as you may like throughout the process. Generally speaking, this is the best approach when you are filing as self-employed for the first time.
On the other hand, tax software is often less expensive and thanks to advanced automation, you are guided step-by-step through the process. Because there is a lot involved with tax forms and deductions, you’ll want to choose a reputable tax software that has high ratings and easy-to-use interface.
Extra tips on how to file taxes as a real estate agent
This guide should put you on the right track to filing as a real estate agent. However, there are a few more tips to keep in mind that will make your experience even better.
Tip #1: Think ahead
As the year gets busy, it’s easy to lose track of your weekly expenses. Items, such as gas receipts, tend to fall through the cracks. However, keeping tax materials organized all year long is one of the best ways to maximize your savings. Simply smooth out the process by storing all your tax documents and business expenses in one safe location.
Tip #2: Don’t rush the process
The last thing you want on your hands is an avoidable tax mistake. Make sure to fill out your forms correctly and give yourself enough time to go through the process. Those who choose to rush to get taxes over with often run into common errors, such as miscalculations and misspellings.
Tip #3: Take advantage of all allowable deductions
As real estate agents, there are several expenditures you can deduct on your yearly return. While the mileage deduction is huge, don’t forget the minor expenses as well. Continuing education courses, marketing materials, insurance, and even home office expenses are eligible write-offs.
Tip #4: See if you qualify for tax credits
In addition to qualifying deductions, some real estate agents may be entitled to tax credits depending on their financial and personal tax status. Earned income tax credit, child tax credit, and saver’s credit are all worth looking into.
FAQs
What can you write off on taxes as a realtor?
As independent contractors, real estate agents are eligible to write-off a great deal of expenses throughout the year. The most common write-offs include:
- Real estate association dues
- Multiple listing service (MLS) dues
- Transportation expenses (maintenance and repairs, gas, mileage, auto insurance, and parking costs)
- Airfare, lodging and meals for real estate education or business
Can you write off clothes as a real estate agent?
Although the IRS approves a significant number of deductions for real estate agents, certain costs don’t meet the requirements. Non-deductible expenses include haircuts, beauty treatments, clothing that can be worn outside of work, dry cleaning (other than uniforms), and traffic tickets..
How much of my commission should I save for taxes?
As a general rule of thumb, it’s important for real estate agents to save 30-40% of what they earn to cover state and federal taxes. Of course, the amount you save is largely determined by the number of sales you make in a given tax year.
To learn more about MileIQ and tax saving tips for real estate agents, visit our website today!
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