For the uninitiated, real-estate taxes can seem daunting. You may be asking yourself questions like how do I pay taxes as a real-estate agent? Where do I go to pay taxes? How much will I have to pay? I’m not a CPA an accountant, but these tips are VERY basic and will get you in the right direction:
In order to understand real-estate agent taxes, you must first understand the concept of small business tax. As a real-estate agent, you operate as a small business. When you work for an employer, ALL TAXES ARE HANDLED FOR YOU. Another way of looking at it, is when you get a paycheck that exactly what you take home. You get to take that money home and do what ever you want with it.
Being a real-estate agent, you must look at each commission check not as a paycheck, BUT INCOME. Almost like your friend wrote you a check for $10,000 because you sold his house. That money you received hasn’t been taxed, but an employer paycheck has been. You can’t just deposit checks that large without paying taxes. You much calculate your own taxes and pay that at the end of the year. Most likely this will literally be a check written to the IRS
#1. Pull out a tax bracket and see how much you will likely be taxed
Last year, I made around $5,000 in my real-estate business (My first year was BAD) So that puts me in the %10 tax bracket! Meaning I would have owed around $500 in federal income taxes at the end of the month.
This year, I will probably make in the $50,000 range. *!IMPORTANT!: YOU ARE TAXED ON A BRACKET-BY-BRACKET BASIS*
$9,325 * %10 = 932
$37,950 * %15 = 5692
%12,050 * %25 = 3012
= $9636 Tax liability
Now you may be thinking to yourself, HOLY SHIT. That’s 10K that I will have to pay to the government! Yes, that’s a lot of money. But budgeting will allow you to not have to deal with the stress. Remember: budget because you don’t want to feel the stress of not having money to pay back the IRS.
What if there were a magical way to reduce that 10K? That would be deductions and credits!
2. Deductions and credits
Regular employees don’t get the luxury of deductions and credits. Their paychecks are static. Real-estate agents and small business owners can manipulate their “tax liability”. You can use expenses and deductions to offset there tax liability.
- Having a home office will allow you reduce taxes
- Gas, travel, meals, etc
- MLS Fees
- If you can prove that it was a cost for you to use towards your business, you can argue it.
My tax liability was $9363
9,363 Tax Liability
-$900 Home office Deduction
-$796 Gas/Travel Deduction
-$2,000 Advertising Deduction
-$1,000 Misc Credit/Deductions
= $4,667 that I will have to pay the government! Not so bad after all. Using tax deductions to reduce your tax liability will greatly decrease how much you will have to pay in taxes.
3. You want to have a specific account to charge all your business expenses
Keeping track of all your expenses will MAKE OR BREAK your tax strategy. When I first started in real-estate, I made the mistake of charging business expenses on my personal debit card. I now charge all expenses onto a credit card that I use specifically for business expenses. Going through your ledger at the end of the tax period will drive you insane.
4. Pick your tax person wisely.
A good tax person will make or break your tax strategy. There are sketchy accountants that will help you put money offshore and there are tax people that WILL DO NOTHING to help you save money. You want somebody in the middle that specializes in real-estate professionals. When I first started real-estate an accountant cost me around ~$1000 because they didn’t help me do and deductions! I was very naive and just let them do my deductions.