Last updated on January 2nd, 2025 at 03:56 pm
Last Updated on January 2, 2025 by
Your tax plan will include making estimated income and self-employment tax deposits. Perhaps the most important part of tax planning is to pay as little as legally possible. This does take planning and knowledge. Your tax planning deadline is December 31st of each year. This article will take you into everything you need to know to create an effective tax plan.
Tax planning is more than spending money only on things that are tax deductible or even have business purposes.
Tax planning is a concept to ensure that you pay what you own but during the year, you expense everything you need to acquire or spend money on. For example, the IRS permits you to fully deduct some purchases in the year in which they were acquired. For other items, you must depreciate the purchase such as real estate over 27.5 years.
Say for example purposes that you are having a very good year, you have sold many houses and your income tax burden will be high. You may want to purchase something that is required for your business this year to deduct it against higher income.
Another example is if you are having a low-income year and know you will be closing some big deals in January or next year. You could decide to depreciate some larger purchases this year. You can accelerate the depreciation next year and take the remainder of the deductions then. This may seem alien to most who are not familiar with tax law and finance. This is why we give you tax tips that you can follow up with your CPA about. Your CPA will guide you through your specific efforts at tax planning.
Investing
Some real estate agents are involved in their own real estate transactions buying and selling rental properties. There are potential capital gains taxes to be managed. Using a 1031 like-kind exchange can affect your taxes.
An important point is that you should start the process of tax planning before you meet with your CPA. Don’t leave all of the heavy lifting to your CPA, learn about the tax code as it applies to the real estate industry and your own business.
Learn more about business finances and tax benefits. After all, you learn how to become a real estate agent, that took study and learning.
Your tax plan will include the following elements which will be explained in more detail in this article:
1. Understand Tax Obligations
- Self-Employment Tax: Real estate agents are considered self-employed, meaning they must pay self-employment taxes (Social Security and Medicare), which is approximately 15.3% of net earnings.
- Quarterly Estimated Taxes: To avoid penalties, agents should make quarterly estimated tax payments. The IRS Form 1040-ES can be used to calculate and pay these taxes.
2. Track All Business Expenses
- Deductible Expenses: Common deductible expenses for a real estate agent include:
- Advertising and Marketing: Costs for promoting listings, business cards, websites, and social media ads.
- Car and Travel Expenses: Mileage, gas, insurance, parking fees, and tolls. Keep a detailed log of business-related travel.
- Office Expenses: Rent for office space, utilities, phone bills, office supplies, and equipment like computers or printers.
- Licensing and Fees: Costs for obtaining and maintaining annual fees for your real estate license, MLS fees, professional fees, and membership dues for professional organizations.
- Continuing Education: Fees for real estate courses, seminars, and other professional development.
- Insurance Premiums: Professional liability insurance and health insurance premiums.
- Home Office Deduction: If a portion of the home is used exclusively for business, deduct home office expenses such as a percentage of mortgage interest, rent, utilities, and repairs.
3. Maximize Retirement Contributions
- SEP IRA, Solo 401(k), or SIMPLE IRA (traditional IRA): Contribute to retirement accounts designed for self-employed individuals. These contributions reduce taxable income.
- SEP IRA: Allows contributions up to 25% of net earnings, with a maximum contribution limit ($66,000 for 2024).
- Solo 401(k): Allows contributions as both an employee (up to $22,500, or $30,000 if age 50 or older) and employer (up to 25% of net earnings), for a total contribution limit ($66,000 for 2024).
4. Utilize Tax-Advantaged Accounts
- Health Savings Account (HSA): If using a high-deductible health plan, contribute to an HSA to reduce taxable income. Contributions and withdrawals for qualified medical expenses are tax-free.
- 529 Plans: If saving for education expenses, contribute to a 529 plan to gain state tax advantages.
5. Strategize Income and Expense Timing
- Defer Income: If expecting to be in a lower tax bracket next year, defer some income to the next year.
- Accelerate Expenses: Pay for deductible business expenses before the end of the year to lower taxable income.
6. Depreciation
- Equipment Depreciation: Depreciate equipment such as computers, cameras, and office furniture.
- Vehicle Depreciation: If purchasing a vehicle used primarily for business, consider vehicle depreciation.
7. Consult a Tax Professional
- Get Professional Help: Work with a CPA who specializes in real estate or self-employed professionals. They can provide tailored advice and help avoid audits. A CPA is a tax expert, find one that works with businesses.
8. Set Aside Funds for Taxes
- Create a Separate Tax Account: Allocate a portion of each commission check (e.g., 30-40%) into a dedicated tax account to cover estimated taxes and year-end liabilities.
9. Stay Up to Date on Tax Laws
- Keep Informed on Deductions and Credits: Tax laws change frequently. Stay informed about relevant changes to self-employment taxes, deductions, and credits.
Federal and state income, social security, medicare, and other payroll taxes (self-employment taxes) must be deposited quarterly. Too many real estate agents fail to comply with the law for various reasons. It’s time to make a change to avoid all of those penalties and interest. The best real estate agents create a tax plan. Your real estate business must comply with many rules and regulations. Tax planning will help you meet the required deadlines.
Real estate agents are paid commissions on the sale of properties at various times of the year. Most agents who have worked for an employer had no concerns about paying required taxes on time. The employer deducted taxes from payroll checks and paid the government. Becoming an independent contractor is a major change for many real estate agents. One of the biggest shocks is that they owe estimated tax deposits each quarter.
The following is a list of the types of taxes you may be obligated to make deposits for:
📊 1. Federal Taxes
a. Income Tax
- Based on annual taxable income.
- Applies to commissions earned and other income sources.
b. Self-Employment Tax
- Covers Social Security (12.4%) and Medicare (2.9%).
- Total self-employment tax is 15.3% of net earnings.
c. Estimated Quarterly Taxes
- Self-employed agents must make quarterly payments to the IRS if they expect to owe at least $1,000 in taxes.
d. Capital Gains Tax
- If an agent sells personal or investment real estate at a profit.
- Short-term gains (held <1 year) are taxed at regular income tax rates.
- Long-term gains (held >1 year) have reduced rates (0%, 15%, or 20%).
e. Alternative Minimum Tax (AMT)
- Applies to higher-income individuals to ensure they pay a minimum tax.
f. Federal Unemployment Tax (FUTA)
- Agents who employ assistants or staff must pay FUTA taxes.
🏛️ 2. State Taxes
a. State Income Tax
- Varies by state; some states have no income tax (e.g., Florida, Texas).
- Others have progressive or flat-rate income taxes.
b. State Self-Employment Tax
- Some states impose an additional self-employment tax.
c. Sales Tax
- If agents sell branded merchandise (e.g., yard signs, marketing materials), they may need to collect and remit sales tax.
d. Business License or Occupational Tax
- Many states require real estate agents to pay a business license fee or occupational tax.
e. Franchise Tax
- Applies in some states to LLCs or corporations, even if no income is earned.
🏘️ 3. Local Taxes (City and County)
a. Local Income Tax
- Certain cities (e.g., New York City, San Francisco) impose their own income tax.
b. Property Taxes
- If agents own property (e.g., office space or investment properties).
c. Business License Fees
- Some localities require annual or biannual fees for business licenses.
d. Local Occupational Taxes
- Fees for conducting business within city or county limits.
📝 4. Employment Taxes (if they have staff)
a. Payroll Taxes
- If employing assistants or staff, agents must withhold:
- Federal and State Income Taxes
- Social Security and Medicare (FICA)
b. Worker’s Compensation Insurance
- Mandatory in most states if employing staff.
c. State Unemployment Tax (SUTA)
- Employers contribute to unemployment benefits at the state level.
💼 5. Miscellaneous Taxes
a. Transfer Taxes
- Paid when agents buy/sell property personally.
b. Excise Taxes
- Applies in certain states on large property sales.
c. Use Tax
- On goods purchased out-of-state but used in the agent’s state.
d. Franchise/LLC Taxes
- If operating under an LLC or corporation.
📅 Tax Deductions to Minimize Tax Liability
Real estate agents can reduce their taxable income by deducting:
Health insurance premiums
Marketing expenses
Vehicle mileage and fuel costs
Office rent and supplies
Professional fees (e.g., NAR membership dues)
Continuing education costs
Just starting out, the first question is what quarterly deposits? How do I make them? Where do I make them? How much should I make? Unfortunately, the theory held by the government is that it is your responsibility to learn these things. If you fail to make a required quarterly deposit, it’s your fault and you may have to pay penalties and fees. One of our goals with this article is to explain exactly how you must comply with the issue of taxable income. Real estate professionals are not unlike any person who owns a business. It seems everything is a trial by fire.
Quarterly tax deposits
Small business owners must make a deposit with the IRS each quarter not later than the date listed in the chart below. The amount you will deposit is based upon your estimation of annual income subtracting annual expenses. We will get into how this is done later.
How do I make quarterly deposits?
The most effective way to make your deposits is to use the IRS online system called EFTPS. To enroll in EFTPS visit EFTPS.gov. Follow the instructions. You can pay by check or electronic fund withdrawal and even pay with cash. The best way is to use the EFTPs system because you can see your payments and know that they were received by the IRS on time. You can make deposits anytime and you can make multiple payments.
For example, you have worked out a plan to take 10% from each commission check and deposit it. You have received three checks this past quarter and have decided to make a deposit after each closing. As long as the total was made before the deadline above, you are good to go. At the end of the year, a great way to get the deposit information to your CPA is to log into EFTPS and print the listing of deposits. This way you will not forget any deposits.
How much do I deposit?
You will find a link at the end of this article to calculators which can be used to estimate how much you must deposit each quarter. As mentioned above you must make estimated deposits for federal income tax and self-employment tax which includes Social Security and Medicare. The IRS rules state that to avoid penalties for the tax year, you must deposit not less than 10% of what you estimate you will owe. Depositing a few hundred dollars when you need to deposit a few thousand dollars can get you into trouble with the IRS.
Self-employed sole proprietors need to create a tax plan. Your tax plan will help you keep track of your expenses. Deductible business expenses will help lower your tax bill. If you have created a limited liability company, obtain a federal tax ID number and use that to create your EFTPS account. Make tax deposits from your separate bank account. You will need to create an audit trail.
Other than federal taxes
Remember, this article discusses federal taxes because they apply to almost anyone reading it. You may live and work in a state that has a state income tax and other state taxes. You may even live in a city that has a city income tax. It’s important that you look into the requirements for making deposits for these tax-collecting agencies.
Real estate investments
Many real estate agents own rental property or vacant land. This is a natural thing as you see a good deal, you buy it and add it to your investment property portfolio. That purchase and subsequent rental income and expenses is yet another business. You should consider creating an LLC for that business to separate it from your real estate business. Tax planning must take into consideration not only your real estate income but also income earned from all sources and expenses.
Creating a separate company for your investment property with its own tax ID number and bank account is a good way to keep your bank accounts separate and calculate tax implications separately. At some point, the net result of your real estate investments will flow into your personal 1040 form along with income from your real estate business which should also be an LLC.
Business expenses
As the chart above indicates there is a whole list of potential tax deductions that arise from the funds you spend. The list above is just an example. Check out this free calculator for a more extensive list of expenses. You can use the calculator to estimate your annual expenses as a real estate agent. The calculator includes section 3 from above for your Roth IRA and any retirement account you start. Contributions to these accounts are tax deductible so they are classified as expenses.
Retirement Contributions
This is where tax planning really comes into its own. There is an art to using your retirement plans to reduce the amount of taxes you must pay. The plans that are the most popular for real estate agents are ones that permit income to be treated as tax-advantaged. This means that you will not owe income taxes on the funds immediately. After you are 59 1/2 you may remove funds from your tax-advantaged accounts without paying a penalty. You will however pay income taxes. The idea is that when you retire perhaps later in your 60’s or 70’s, your income will be much lower, and therefore taxes will be lower.
The beauty of some of the tax plans is that they will allow not only a contribution from you but also from your LLC or Sub S Corp. The IRS recognizes the company as an entity and allows it to contribute to match your contribution. This is similar to working for a corporation that offers a 401(k) plan that they match. Some of these plans are better than a corporation 401(k) with a small match. The match could be almost twice as much allowed to the corporation. There is much to explain here so we have held it for another article.
Make it a point to take X% out of commission checks to fund your retirement account. Time is your friend. The sooner you get started the more you will eventually earn. As your income level increases over the years, your retirement funds will grow faster.
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