As mentioned earlier, being an agent means that you are paid to help people buy or sell a home. However, what most agents don’t realize is that they also owe taxes just like other individuals who work for a wage.
In fact, some states require agents to pay more in tax than non-agent professionals. This can be confusing because it seems contradictory to be paid to do something that you have to pay taxes for!
Fortunately, everything about real estate taxation is complicated enough that there are professional resources available to aid in paying the right amount of income tax. All too often, though, these resources aren’t very easy to find. That’s why we’ve put together this guide – we hope you’ll enjoy reading it!
This article is not meant to give legal advice nor does it constitute a definitive list of all relevant laws. Instead, we aim to inform readers of any potential tax liabilities that may arise from doing business as a real estate agent. If you would like specific guidance on how to comply with the law, talk to a lawyer in your area.
We do not receive compensation (such as cash rewards or financial assistance) for writing this article. Rather, our motivation comes from our passion for sharing knowledge and information. We wish to contribute towards a healthier working environment by bringing attention to potentially unfair practices.
They must keep records of their income and expenses
As mentioned before, as a real estate agent you are required to maintain very detailed records of your business transactions and activities. These include notes about each property you list, how much money you make or lose on a listing, what services you pay for and whether you get reimbursed for them, and lots more!
Not only do you have to be able to recall every little detail about your business, but you also need to organize all this information properly so that you can refer back to it later.
You will probably gather quite a bit of tax information from conversations with other agents and your accountant, but making notes in a notebook is not enough. You will want to know who paid you a compliment, if they asked you to work on their house, and if they gave you an opportunity to earn extra by referring them to you. All these things add up and show income for your business, so they have to be recorded too!
Most people don’t realize that when someone pays you to promote or talk about their home, charity, or business, this has to be accounted for as taxable income. It is important to note who benefits from your promotional efforts and record this information correctly.
Charity cases are different than sales cases where you receive a salary or royalty fee instead of being paid per transaction.
They must report all their income and expenses on their tax return
As mentioned before, as your real estate agent, you are required to disclose everything about yourself and your business on your taxes. This includes not only your name, address, and phone number, but also how much money you make as an agent, any additional qualifications like being licensed, and if you work for a broker or firm, they too need to be disclosed.
You have to include all of these things in your tax returns whether you’re paid through commission, flat fees, or both, so that people can verify that this information is accurate. You also have to indicate where your earnings went – some countries require separate filings depending on whether it was for personal use or professional use.
Experts say that most agents don’t do enough to keep themselves out-of-the-way when it comes to reporting their income and other financial info, which may put them at risk of getting audited. So, while it’s important to take care of “business” matters such as paying bills on time and keeping track of your receipts, there’s one area that everyone should consider putting more effort into — disclosures.
They may be able to deduct some of their expenses
After paying all your bills, credit cards come last. The easiest way to do this is to hire someone else to take care of it for you. More than half (50%) of home sellers have their own housekeeper they pay through payroll services, while one in five (21%) use an online service like HomeKeepers or HireAHelper, reports REI.
You can find these services at any time, so it’s easy to start working during the selling process. Before signing anything, make sure to check out these services’ reviews and ask about customer safety.
Many people begin doing this after hearing about how tax professionals get paid per hour and what taxes they are allowed to deduct.
Real estate agents are not automatically given these benefits, but there are ways to earn them!
Here are several reasons why real estate agents might be able to claim certain deductions, according to IRS Publication 571:
Costs related to running a business
Taxpayers in the entertainment industry can already benefit from costs such as production equipment and talent fees.
But the same goes for anyone who works from home. By qualifying as a professional employee, you could save money in income tax payments and benefits.
If you work away from your office more than 30 days every 90 days, you can include daily travel as part of your job. This means finding another place to stay and transport costs to and from work.
They must pay estimated tax
As mentioned earlier, agents are not exempt from paying taxes per state requirements. Most often they have to pay an additional fee for being in the business of selling real estate, which includes paying income tax and/or self-employment tax.
In addition to these two main types of taxation, most states also require agents to pay an annual franchise or registration tax. This is typically due at the start of each year that you work as an agent, but can be paid annually instead.
This tax is usually very expensive because it’s calculated using your sales revenue, not just what you earn during a given period. Some estimates say that this cost is up to $100,000! (That’s more than a million dollars!)
Because it’s so expensive, many people who sell homes don’t need to pay it unless their revenues reach certain thresholds. But if you do make big money, this extra tax will still hurt. It’ll add to your total tax burden already including other personal deductions.
They may need to set up a business bank account
As mentioned before, as your real estate agent you are required to pay taxes on your earnings. These include any income that comes from selling or renting an apartment or house. But what happens when they don’t get paid?
Since most agents aren’t self-employed, they are typically employed by a broker or company, and therefore their employer is responsible for paying these taxes. What many people don’t know though is that employers can be very tricky about how they calculate this tax.
For example, say your boss doesn’t agree with one of your sales and so he decides not to give you payment at the end of a particular month. Or maybe he gives you less than expected due to a loss in the sale.
In both cases, you might not see the full amount of your salary go towards paying your personal taxes, and it could easily slip through unnoticed. This is especially true if your employer uses a payroll service to handle all of his or her employees’ salaries.
They should consider creating or joining a real estate agents’ association
As we have seen, as an agent you are required to pay business use tax in your local jurisdiction. What is business use tax? It is basically sales tax that applies to businesses while they are buying or selling goods or services.
Businesses can typically claim certain exemptions from this tax, but unfortunately not all jurisdictions apply them consistently. Some may even put restrictions on how many exemptions you get!
That means if you’re trying to avoid paying business use tax by claiming too many exemptions, you could end up overpaying instead!
It’s important to be aware of which exemptions apply to residential real estate agencies so you don’t waste your time and money trying to keep yourself under the radar.
They should consult their accountant or financial advisor
As an agent, your tax situation depends not just on you as an individual but also your business structure, how you organize your real estate agency, and who pays your bills.
As such, it’s important to talk with your accountant about what kind of entity you want to use for your agency, whether that be a sole proprietorship, partnership, LLC or corporation.
This will have implications in terms of income taxes, capital gains taxes and even personal liability!
It’s very common for agents to pay themselves a salary, so asking if there are any payroll services you can hire is another topic to discuss with your accountant.
But beyond those basic things, more advanced questions include: do you need to form an S-Corp or C-Corp? What types of insurance does your agency require? Who manages your office space? And what happens when someone leaves? All of these things could mean different levels of taxation depending on the answers to the above mentioned questions.
And while some of these may seem like trivialities, they can add up quickly due to all the other expenses associated with paying employment related taxes.
They should keep copies of their tax returns
As mentioned before, agents are taxed on all income they earn, including fees for representing you in a sale or buying property, dividends from stocks they own that include your house as a dividend, and interest and Dividends on savings accounts linked to your real estate business.
Agents also have to report certain expenses when filing taxes. This includes things such as legal fees, office supplies, mobile phones used for agent work, and mileage for trips made related to their job.
Not only do agents need to know how to manage their money, but they must maintain records to prove their deductions! It is very important to retain these documents for at least three years after submitting them.
Some states require you to be able to document your expenses as well. For example, in California you’re required to record your meals and hotel stays for more than five days within a year. If you don’t, then you could face audit fines and even potential criminal charges.
It’s totally normal to feel nervous about being a real estate professional, however, there are plenty of resources available to help you operate your business smartly. An experienced broker can be a great source of knowledge since they’ve been through the process many times.