Maximizing Your Tax Return (Real Estate Agent Edition)
As a real estate agent, you earn income from commissions on real estate sales you facilitate. Because you are self-employed, you’ll receive a 1099 form at the end of every year. It’s important to track your expenses and income throughout the year to ensure that you’re taking advantage of every opportunity to maximize your tax returns.
Today, we’re answering the most common questions we field from new real estate agents regarding tax filing procedures, tax deductions, and how to calculate just how much income you should be stashing away to pay your taxes.
Q: Which tax forms do real estate agents need to submit?
Independent contractors file different forms than those used by employed individuals. The forms you’ll be using are:
1099-MISC
This is the form on which you will report your income. Parks will give you a 1099-MISC form to document your earnings through our brokerage. The 1099-MISC replaces the W-2 employees are given.
Form 1040-ES
This is more of a booklet. The 1040-ES will help you estimate and pay your taxes every quarter.
Form 1040
This is your yearly tax return form, which is used by everyone who reports income tax. Because you’re self-employed, you’ll fill out a few new portions of the form: Schedule SE and Schedule C. These sections will calculate your net profit and resulting taxes.
Q: How much of my income should I be setting aside for taxes?
The standard recommendation suggests that self-employed individuals set aside 30% of their income to cover taxes, social security payments, and self-employment insurance. Because Tennessee has no state income tax, the federal rate of 15.3% of your net income is the only tax rate that will apply to you. Of course, other household income, marriage status, and number of children will cause this amount to vary from person to person.
By setting aside 30%, though, you will be fully prepared to pay all income-related expenses you may encounter.
Q: How often will I be paying taxes?
Real estate agents can send payments as often as after every closing, or as infrequently as quarterly (provided you expect to pay more than $1,000 in tax payments). Most real estate agents pay their taxes on a quarterly basis, and we highly recommend new agents get in the habit of doing so as early as possible.
Q: Which tax credits do real estate agents qualify for?
If you are working with an accountant or using tax filing software, we suggest going through all of the credits available to see which apply to you. However, the following are tax credits that real estate agents often claim:
Earned Income Tax Credit
If you’re a new agent, you may have earned less than $55,000 this past year. If you did, you most likely qualify for this tax credit.
Child Tax Credit
This credit has been worth $2,000 per child in years past but may be worth more during the pandemic. Speak with a tax professional for information relevant to your situation.
Child Daycare Credit
If you paid for childcare in 2020, you can claim 20% - 35% of these costs, for a total credit of up to $3,000.
Saver’s Credit
Are you contributing to a retirement account? If yes, you can claim this credit, worth up to $2,000.
Education Credits
If you or your children are pursuing higher education, you may qualify for the American Opportunity Credit, worth up to $2,500 per year. The Lifetime Learning Credit can get you up to a $2,000 credit annually.
Residential Energy Credit
Did you upgrade your home’s energy efficiency by adding a solar-powered water heater or solar panels last year? If so, you may qualify for this credit, which is worth up to 30% of the upgrade costs.
Q: What types of annual costs are deductible as business expenses?
The IRS permits business owners to deduct any expenses that are “ordinary and necessary.” As a real estate agent working during the pandemic, you will potentially be permitted to deduct vehicle expenses, home office costs, supply fees, computer costs, realtor license preparation course fees, exam fees, MLS fees, Suprakey fees, client gifts, your work-only cell phone and related plan, and more. Nearly any cost that exclusively relates to the operation of your business likely qualifies.
If you pay for any business expenses on a credit card, be sure to use a dedicated business credit account. This will allow you to easily track expenses and deduct the cost of interest along with them.
Q: I received my real estate license in 2020 but have not yet collected any income. Am I still permitted to deduct my business expenses on my taxes?
If you’ve been investing in your business, you may file a Schedule C along with your tax forms. This will demonstrate your expenses and reduce your taxable income. We wish you success in 2021!
Q: I’ve heard other realtors talk about establishing themselves as LLCs or S-Corps. What’s the income threshold at which this kind of move pays off?
This topic is hotly debated amongst real estate agents, but generally speaking, an agent can register an LLC with the IRS as an S-corp to avoid double taxation and provide the agent with additional protection against personal asset loss in case of litigation.
However, this approach only begins to be fiscally profitable with regard to taxes once one is earning around $100k per year.
Still, there are multiple other reasons you may wish to establish yourself as an LLC. We encourage every agent who is serious about making real estate their primary means of income to meet with an accountant who can provide expert, tailored advice.
Whether you plan to hire an accountant, use software, or file your taxes on your own, we hope this overview has you feeling prepared to proceed with confidence!