For those unaware, real estate agents – though they likely work under a particular brokerage – are considered self-employed by the IRS. As such, tax professionals have a great opportunity to provide good value to existing clients and expand their client base for real estate workers.
As a trusted advisor, you can advise them on some easy-to-digest tax tips and help them save vital tax dollars and improve their cash flow. Whether these clients or prospects are transitioning from another career or diving into their first real job, you can help them understand how to manage more involved tax responsibilities.
Tax Tips for Real Estate Workers
Your “ordinary and necessary” business expenses will be deducted from gross commissions to arrive at net income. The IRS requires quarterly estimated tax to be paid on the 15th day of April, June, September, and January.
Here is what your real estate professional clients need to know:
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, such as marketing and advertising expenses and office supplies. To understand the full details of what is considered a qualified deduction, consult IRS Publication 334 for small businesses. Remember to keep records and files of all expenses. 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.
Transportation expenses. When you’re deducting transportation costs, you can’t deduct the commute between your home and your office (if you have one). You can, however, deduct the trips when you take real estate clients from one property to another. You have the option to choose between two methods: actual expenses or the IRS standard mileage rate (54 cents per mile for 2016).
Home-office expenses. The IRS allows you to take a home-office deduction as long as a portion of the home is used exclusively and on a regular basis for business purposes. Any allowable home-related itemized deductions, such as mortgage interest and real estate taxes, can still be claimed. The IRS also provides a simplified calculation for figuring the deduction for using your home for business, by multiplying the area of your home used for business by $5, up to a maximum deduction of $1,500.
Health insurance. You can deduct the costs of your personal health insurance premiums as a self-employed person as long as you meet certain criteria:
- Your business is claiming a profit. If your business claims a loss for the tax year, you can’t claim this deduction.
- You were not eligible to enroll in an employer’s health plan. This also includes your spouse’s plan. If you were eligible to enroll in one and chose not to, you cannot claim this deduction.
Retirement plans. There are a variety of retirement plans available to small businesses, such as the SEP, SIMPLE IRA, and SIMPLE 401(k). Because this money is tax-deferred, the government is rewarding you for creating your own retirement plan by not taxing you on the income until you withdraw the money down the road. Contributions to these retirement plans can be made up until the due date of the tax return. The small business owner is also allowed a tax credit equal to 50 percent of the first $1,000 incurred in starting up a plan.
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 2016, the combined self-employment tax was 15.3 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.
About Mike D'Avolio, CPA
Mike D'Avolio is senior tax analyst with the Intuit Professional Tax Group, he has been a small business tax expert for more than 20 years and serves as the primary liaison with the IRS for tax law interpretation matters, manages all technical tax information, and supports tax development and other groups by providing them with current tax law developments, analysis of tax legislation, and in-depth product testing.