Maximizing Your Tax Return
Tax season is here, which means new real estate agents are tasked with navigating their taxes independently—perhaps for the first time. Never fear, we’re here to help! The team at Parks Realty has created a guide to ensure that each of you is maximizing your tax returns as an agent. Armed with this information, we’re confident you’ll sail through this tax season.
Real Estate Agent Tax Classification
For tax purposes, real estate agents are classified as self-employed. Like any other independent business owner, it’s up to you to manage your tax payments. You’ll be using your commission totals to calculate your income bracket.
Understanding Tax Forms
As someone who is self-employed, you’ll receive different forms than someone who is employed. Let’s review the forms you’ll be using.
1099-MISC
1099-MISC is the document that reports your total income. Parks Realty will provide you with a 1099-MISC.
Form 1040-ES
This booklet will guide you through estimating and paying your taxes each quarter.
Form 1040
Like anyone reporting income tax, you’ll fill out a 1040 form annually. In addition to the fields you have likely filled out as an employee in your former jobs, you’ll additionally fill out Schedule SE and Schedule C.
Quarterly Tax Schedule
Employees of a business or corporation will have earnings withheld from their paychecks. Their employer pays income taxes throughout the year on their behalf. This means that end-of-year taxes are merely an exercise in affirming the payments that have been made. Over-payments are refunded, while under-payments must be rectified by additional contributions.
As a real estate agent, you’re responsible for making payments on your own. Instead of making payments on what you’ve already earned, you’ll be using a 1040-ES booklet to estimate your projected income each quarter. As a general rule, agents should be prepared to withhold 30% of their earnings to pay their taxes.
While you can make your tax payments as frequently as you like - even after each commission - the minimum required payment schedule is quarterly.
The quarterly tax schedule is usually as follows:
January 15
April 15
June 15
September 15
Self-Employment Taxes
In addition to income tax, you are also required to pay social security and Medicare taxes. These self-employment taxes are paid on the same quarterly schedule outlined above.
State Income Tax
We’ll only be covering federal tax recommendations because real estate agents are not required to pay state income taxes in Tennessee.
Tracking Expenses
It is absolutely essential that you carefully track your expenses all year long. We recommend that agents use a separate account for their real estate income, complete with a separate debit or credit card. It’s supremely difficult to untangle business expenses from personal expenses without this complete delineation. Furthermore, if your work credit card is separate from your personal line of credit, you’ll be able to deduct interest payments.
Additionally, you’ll want to download an app that will help you track your business mileage. This will ensure that your personal driving time does not complicate your mileage deduction efforts.
Including All Deductions
In order to maximize your tax returns, you’ve got to deduct all expenses related to your real estate business. Categories you can deduct include, but are not limited to:
Miles incurred in business travel
The cost of all supplies used in your business
The cost of gifts you purchase for clients
Meals to which you treat clients while you’re working
Your home office (provided it’s used only for work, and is your primary workspace)
Your work wardrobe
Marketing costs
Professional services costs (website designer, blog writer, real estate coach, lawyer, and CPA—even tax prep)
Retirement contributions
Continuing real estate education costs
Real estate conference fees
Subscription to professional publications
License renewal fees
Errors and Omission Insurance (if it’s included on your 1099)
Tax Credits
You are eligible for the same tax credits as employed individuals. Take a look at every tax credit and apply for each one that applies to your circumstances.
The Benefits of Hiring a CPA
As an independent contractor, it is worth considering whether you’ll benefit from hiring a CPA instead of working on your taxes alone. A CPA, especially one who works with other real estate agents, will be able to guarantee you pay as little in taxes as possible.
Additionally, a CPA will help you make smart choices throughout every year. CPAs keep up on every change to tax law, which means they will be able to help you change your practices in real time to maximize your tax returns. Over time, the funds you hang onto will far outweigh the expense of paying your CPA.
Keep in mind, too, that the time you’ll invest in working on your taxes by yourself is time you can’t spend on your real estate business. However, tax software has never been easier to use, and there are several services you can choose from should you choose to go it alone.
The Takeaway
If this is your first year as an independent contractor, this may feel like an overwhelming process. With each year that passes, though, you’ll gain experience and confidence. Once you’ve made it through this year, you’ve probably made it through the most difficult one.
If you need further advice on managing your taxes as a real estate agent, please hire a CPA and reach out to your professional mentor. Each agent goes through this process; you’re not alone, and if they can manage their taxes, so can you!