Working in real estate can be a great way to work for yourself and have more flexibility while making a good income. But if you're not careful around tax time, it can be a costly way to earn money. Between regular personal income taxes (both state and federal) and self employment taxes, you can lose between 15.3% and 54.9% (at the highest tax bracket of 39.6%) to the tax man. So, how can you reduce this number as much as possible? There are two primary means available to every agent.
Employee vs. Independent Contractor
Real estate agents often work for an agency as independent contractors. Independent contractors are not employees and generally enjoy more autonomy. But since there is no employer, payroll taxes must all be paid by the worker (doubling what wage workers must pay for themselves). In addition, most employee protections are not available -- usually including workers' compensation, unemployment benefits and employer-provided benefit packages. If you don't have a lot of deductible expenses (more on those below), you may benefit from working on the payroll as a regular employee.
Take All Deductions Available
If you choose to work as an independent contractor, you have the ability to take business expenses as deductions against your income. If you incur a lot of costs in your real estate work, this may make independent contract work more beneficial. What kinds of deductions can you take? Look for expenses like these:
- Marketing expenses, including websites, business cards, flyers, mailers, outdoor advertising and mailing lists
- Accounting and legal fees
- Business gifts (up to $25)
- Licensing, renewals, and continuing education costs
- Business percentage of your cell phone use
- Meals and business meetings (with clients, potential clients and other income producers)
- Desk fees
- Computer software
- Business loans, including business credit card interest
- Internet access fees
- Travel costs (with some limits on meals and entertainment)
- Referral fees, if these are allowed by your state's regulations
- Insurance, such as liability or errors and omissions insurance
In addition to these expenses, be particularly sure to take two important deductions: mileage and the home office deduction.
- Mileage. Real estate agents need to be especially careful to track their mileage since so it's likely to be one of their biggest business expenses. Keep a mileage log that shows your trips, the mileage used, dates and reasons. The deductible mileage rate varies by IRS rules every year, but it adds up very quickly if you're a road warrior.
- Home Office. If you do work from home, you can deduct a portion of your home costs or take the standard deduction ($5 per square foot in 2015). The trick, however, is that the space must be used exclusively for work purposes and cannot be used for anything else (including recreation, personal storage or kids' play).
Get Professional Help
If you're new to the real estate game, it may be best to work with a professional accountant to prepare your taxes and advise you about tax implications you don't know -- like paying estimated taxes. While understanding your tax situation may mean a little financial and time investment now, the result will be a more successful career change and a more profitable future. Contact a business, such as The Callen Accounting Group, PLLC for more information.