Did you become a self-employed real estate agent last year? If so, you now own your own business and can take advantage of a lot of tax benefits related to running your own business.
It’s important to realize that becoming a real estate agent isn’t just about selling property, it’s also about becoming self-employed. This means that you no longer receive a salary, complete with tax withholding.
Instead, you receive commission income, and at the end of the year, your broker provides a Form 1099-Misc, rather than a W-2. From a tax standpoint, that changes everything.
Your compensation will be based on your sales activity from selling homes. You’ll be paid a certain percentage of the gross commission on any sale, based on a predetermined split with your broker and any other agents involved.
Generally, no taxes are withheld from that income and at the end of the year, your broker will issue an IRS Form 1099-MISC. For income tax purposes, the income reported on this form will represent your gross income which will be reported on Schedule C of your federal income tax return. You will also be able to deduct expenses directly related to your business from your gross income to arrive at your net income.
Since income tax is not withheld, it’s important to remember to make quarterly estimated tax payments. Income tax is a “pay as you go” tax, so quarterly estimated tax payments are required, in general, if you think you are going to owe $1,000 or more in taxes.
Tax Deductible Business Expenses
One of the advantages you have in being self-employed is the amount of tax-deductible business expenses you can take.
Typical expenses for a real estate agent will include:
- Training and licensing expenses.
- Auto expenses, for business use of your car in connection with your real estate sales activity. (You can use either actual expense or the IRS business mileage allowance of 54.5 cents per mile for 2018 (58 cents per mile for 2019).
- Marketing and advertising costs you pay directly in the sale of any properties.
- Travel, if you attend any out-of-town conventions, training sessions, or conferences.
- Meals you pay for when meeting with clients for business purposes. Under IRS guidelines, you can deduct 50% of the cost of business-related meals.
- Home office, if you work out of your home. If you have a home office that represents 10% of the square footage in your home, you’ll be able to deduct 10% home costs like mortgage interest, property taxes, rent, and utilities.
- The purchase of office equipment, such as a dedicated business computer, printer, smartphone, or fax machine.
- Internet and cell phone expenses.
QuickBooks Self-Employed will help you track your business income, expenses, mileage and capture your receipts year round and then you can export your information to your TurboTax Self-Employed or TurboTax Live Self-Employed tax return.
Since you’re now self-employed, your income will be subject to the self-employment tax. It’s 15.3% but applies to your net business income, not the gross income showing on your 1099.
For example, if your 1099 shows $30,000 in gross income, but you have $10,000 in business expenses, your net income will be $20,000. That’s the amount will be subject to the self-employment tax.
And fortunately, you can deduct half the self-employment tax as an expense against your income for federal income tax purposes.
Self-Employed Retirement Contributions
This is another tactic you can use to reduce your taxable income. It won’t reduce your income for the self-employment tax calculation but it does reduce it for federal income tax purposes.
Contributions made to a retirement plan are generally tax-deductible. The most basic plan is the traditional IRA, which enables you to contribute and deduct up to $5,500 ($6,500 if you’re 50 and over) in 2018 for an IRA.
But that’s only the beginning. There is another retirement plan you can use that may permit a much larger tax deduction. A SEP IRA, which allows you to contribute the lesser of 25% of your net income or up to $55,000 for 2018.
You can also make a 2018 contribution to a traditional IRA or a SEP-IRA up until the tax deadline and possibly lower your tax liability for 2018. Just make sure your plan administrator knows that you are making a 2018 contribution.
Don’t worry about knowing these tax rules. TurboTax Self-Employed will ask you simple questions about you and your business and give you the tax deductions and credits you’re eligible for. TurboTax Self-Employed finds industry-specific tax deductions you may not have even known were possible.
If you have questions, you can connect live via one-way video to a TurboTax Live Self-Employed CPA or Enrolled Agent with an average of 15 years experience to get your tax questions answered. A TurboTax Live Self-Employed CPA or Enrolled Agent can also review, sign, and file your taxes from the comfort of your home.