The National Association of Realtors® (NAR) reported in 2016 that the average age of new association members is 43. This suggests that many first-time real estate agents are entering the profession as a second career, after significant time working in another field.
Whether you’re transitioning your career or you’re diving into your first real job, you may be new to managing your own cash flow, paying quarterly taxes and shifting your mindset from employee to self-employed. Here’s a guide to help plan for and pay your quarterly taxes.
First, understand your responsibilities
To be a real estate agent, you must be a jack-of-all-trades. Develop your strategy to tackle your responsibilities by asking yourself these questions:
- Marketing — How do you market yourself and your properties? What media or technology must be used?
- Advertising — Where and how do you advertise properties to gain maximum exposure for the least cost? What will catch a buyer or seller’s eye?
- Office management — How do you keep yourself organized and efficient? How do you manage costs for a home office? What supplies do you buy?
- Sales — How do you learn about cold calling, following up on leads, negotiating commissions and closing deals?
- Accounting — How do you track sales and expenses, maintain receipts, file accurate and on-time taxes?
- Benefits — How do you acquire health insurance, learn about health insurance deductions, and continue contributing to a retirement plan?
Maximize your deductions and minimize your expenses. These goals will keep you on the critical path to financial gain.
Second, understand estimated tax
As a real estate agent, you are considered self-employed by the IRS, even though you will likely work under a particular brokerage. This means you should learn the basics of estimated tax, since you’ll be responsible for your own.
According to the IRS, “estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax.” Self-employment tax is comprised of Social Security and Medicare taxes. You can estimate your self-employment tax using an online calculator.
Third, develop and follow sound financial practices
Some brokerages may, depending on your state, withhold business and occupation tax (B&O), measured on the gross income of the business. Other states will have income tax. Check online for your state’s income tax rates and requirements. Keep your real estate career in the black from the get-go with the following practices.
Get a separate bank account.
The easiest way to keep your real estate income and expenses from getting mixed with your household budget is to create a separate business checking account. Any profit you want to use to pay your household expenses can be considered a draw that you can transfer into your household account.
Track every possible deduction.
Many agents, new to being self-employed, don’t realize the vast array of what is considered a possible deduction according to the IRS. To understand the full details of what is considered a qualified deduction, consult IRS publication 334 for small businesses. Keep records and files of all expenses.
Pay taxes accurately and on-time.
Employers pay your payroll taxes, and they, just like you, pay into your Social Security and Medicare. But when you’re self-employed, you pay both shares.
The IRS requires your quarterly payments on the first of the month in April, June, September and January. Notice these dates aren’t always on the typical quarter-end.
Here’s how to calculate your quarterly taxes ―
- Determine your net income.
After adding up your business expenses, deduct your expenses from your gross commission. This is your net income. Use your prior year as a baseline. If you think you will make more or less than your prior year, estimate accordingly.
- Calculate your self-employment tax.
Self-employment tax is a combination of Social Security and Medicare taxes. Typically, an employer pays half of these taxes, but when you are self-employed, you pay the full amount.
For 2015, the combined self-employment tax was 15.8 percent and you are taxed on the first $118,500 of your net income (assuming your net income was at least $400). You can deduct the employer portion of the tax as well as deduct the cost of any health insurance premiums paid.
For example, if your net income was $20,000, your self-employment tax is calculated as:
$20,000 x .0158 / 2 − health insurance premiums paid
- Determine your itemizations.
Check the IRS website for a list of itemizations.
If you don’t itemize, then use the standard deduction. Subtract this amount from your net income amount calculated in step 2.
- Subtract your personal exemption.
You can take a personal exemption for yourself and every dependent.
In 2015, the personal exemption was $4,000 up from $3,950 the previous year. Subtract this deduction from your calculation in step 3. Check the IRS website for other tax deductions that increased last year due to inflation.
- Determine your federal tax rate.
Take the final amount determined in step 4 and calculate your federal tax using the rate tables. The tax tables change yearly so be sure and check the rates each year.
- Subtract any tax credits.
Check the latest tax credits such as child, dependent care and education credits and deduct any that you qualify for from the tax amount calculated in step 5.
- Divide the tax due by the four IRS quarters.
You have a lot to master to be a successful agent. But you don’t want to spend valuable lead-sourcing or sales-negotiation time fiddling with your receipts or worrying about taxes.
If you don’t want to hire a tax professional right away, try a free trial of an easy-to-use financial software. QuickBooks Self-Employed can help you capture receipts, find deductions, log your mileage and calculate and file your quarterly taxes. Check it out and sign on if it’s a good fit for you.