Jumping into self-employment can feel fun, exciting, and a little bit daunting as you try to figure out the financial implications of your new job.
You might view being your own boss as an exciting challenge to see how far you can take your business. On the other hand, being completely responsible for your health insurance, business taxes, and retirement plan may make you break out in a cold sweat.
Have no fear! There are three basic parts to self-employment taxes: income, expenses, and deductions. Once you have a basic understanding of how these elements work together, you’ll feel more confident as an independent contractor.
Report Your Income
Real estate agents are classified as self-employed contractors because their income is tied to sales and not to the hours that they work. As independent employees of brokerages, real estate agents receive a 1099 tax form from their broker that reports their yearly income.
There are many different types of 1099 forms. Previously, contractors received a 1099-MISC for any income they earned, but as of 2020, the IRS has started encouraging companies to send form 1099-NEC to their contractors. You may start seeing form 1099-NEC in January 2021 for any self-employed income you’ve earned.
What Is the Difference Between Expenses and Deductions?
A business expense is the amount of money you spend on your business in an “ordinary and necessary” way. It may be helpful to think of it as buying the tools or items you need to do your job.
A business deduction is an expense that you deduct from your taxable income. Deductions are also expenses, but all expenses are not deductions.
For some taxpayers, it makes sense to take the standard deduction. This is a flat rate you can deduct from your taxes, and it is often adjusted from year to year. For self-employed individuals who have carefully tracked their expenses, if their expenses exceed the standard deduction, it makes more sense for them to itemize their deductions.
Whether you have expenses or deductions to claim, you should keep careful and detailed records so that in the event of an IRS audit, you are prepared to justify your tax return.
What Expenses Can Real Estate Agents Write Off?
As a self-employed contractor, you have many opportunities to write off your expenses. The following items are some common write-offs for real estate agents. Remember, in order to show that these are business expenses, you should be able to prove that you purchased or used these items regularly for your job.
Auto Expenses:
- Mileage
- Gas
- Oil changes & tire service
- Parking fees
- Car insurance
- DMV registration
Dues, Memberships & Subscriptions:
- MLS dues
- Realtor® Association fees
- BNI membership
- Software
Office Expenses:
- Desk fees to brokers
- Copy fees
- Business license fees
- Home office expenses
- Security alarm service
- A portion of rent or mortgage
Advertising and Promotion:
- Marketing
- Printing and postage
- Social media management
- Trulia and Zillow fees
- Bandit signs or billboards
What Other Kinds of Deductions Can Real Estate Agents Use?
Independent contractors can also deduct benefits or services that an employer usually pays for:
Health Insurance- If your business is generating a profit and your spouse doesn’t have employer-provided health insurance, you can purchase health insurance and count the insurance premiums as a deduction.
Education- Real estate courses and marketing classes that you need to grow your business could be tax deductible. Ask your tax professional if this applies to you.
Retirement Funds- You can and should continue to contribute to a retirement plan, even if you don’t have an employer match like many larger companies offer. Contributing to a Roth IRA or solo 401(k) will reduce your taxable income, and set you up for success in your retirement.
FICA Tax- Since self-employed individuals pay both sides of the FICA tax, you have the opportunity to deduct a portion of the FICA tax from your taxes.
Section 179
For small business owners, Section 179 could provide a boost as they try to get their businesses off the ground. It offers an immediate tax deduction for depreciable assets like cars, office equipment, or computers instead of stretching the depreciation over several years. For a more in-depth look at how you can apply Section 179 to your business expenses, check out this Investopedia article.
Should I Pay Quarterly Taxes?
If you expect to owe more than $1,000 in federal taxes for the year, you should pay quarterly taxes. Because of the feast-or-famine lifestyle that sometimes accompanies the real estate world, setting aside 25-30% of every check will leave you prepared for any tax bill regardless of its size. Spending entire checks and anticipating that you’ll earn enough later to cover taxes is a risky financial move. It is better to be over-prepared to pay the IRS than to find yourself scrambling to cover your quarterly taxes. Here are the quarterly estimated tax due dates for 2021:
The Bottom Line
Navigating taxes can be complicated, especially if you’re new to the world of self-employment. If you’re concerned about missing an important deduction or owing more on your taxes, it may be a good idea to hire a tax preparer to help you for the first few times that you file. As you become more confident in self-employment taxes, you can start filing on your own.
The tax code is always changing, so keeping an eye on changes specific to independent contractors can help you adjust your business record-keeping system so that you’re prepared to maximize your income and minimize your tax liability.
Disclaimer: This post was not written or reviewed by a professional financial advisor, and the suggestions should not solely be used to make financial decisions.
