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Real Estate Agent Tax

Real estate agent tax will primarily be treated as self employment income. Real estate agents are statutory non-employees and are treated as self-employed for all Federal tax purpose including income and employment taxes if:

  • Substantially all payments for their services as real estate agents are directly related to sales or other output, rather than to the number of hours worked
  • Their services are performed under a written contract providing that they will not be treated as employees for Federal tax purposes

Most real estate professionals operate their business as a sole proprietorship. This means that you are not someone’s employee, you haven’t formed a partnership with anyone, and you have not incorporated your business.

Self-employment taxes

As a real estate agent you should get a 1099 form at the end of the tax year. The 1099 form will state the amount of income you earned that year. You may have one or several 1099s depending on who you worked with throughout the year. Because you are self-employed no one has taken taxes out of your paycheck. This means that you will need to pay taxes on Social Security (your portion and the match that an employer would have contributed for an employee). This means 15.3% tax.

Ordinary and necessary expenses

The good news is that you get to deduct ordinary and necessary expenses. These expenses include things you have to pay such as licensing, commission and fees and this that you pay to increase your income. Remember, you must keep good records. Not just a box full or receipts. Every receipt needs to have the business purpose for the expense. If you don’t annotate receipts your deductions could be disallowed by the IRS. This means a larger tax bill for something that may have taken you 5 seconds per receipt.

Separate bank account

Some people make the mistake of not separating their business and personal accounts. Do you really want the IRS to have access to your personal account? Also, from a practical perspective it will make your recording keeping that more difficult because you need to parse business and personal expenses. Especially, when some expenses can be business and personal such as buying the cheese platter from the grocery store for the open house. How will you prove two and a half years from now to an auditor that it was a business expense? Well, you might say that is a small expense so you can forgo the deduction. Well lots of small expenses can add up to hundreds if not thousands of dollars in lost deductions.