Real Estate Employment Taxes Explained

Did you become a self-employed real estate agent last year? If so, you now own your own business and can take advantage of many tax benefits related to running your own business.

It’s important to realize that becoming a real estate agent isn’t just about selling property, it’s also about becoming self-employed. This means that you no longer receive a salary, and you do not have tax withheld from your pay.

Instead, you receive commission income, and at the end of the year, your broker provides a Form 1099-NEC, rather than a W-2. From a tax standpoint, this changes everything.

Commission Income

Your compensation will be based on your sales activity from selling homes. You’ll be paid a certain percentage of the gross commission on any sale, based on a predetermined split with your broker and any other agents involved.

Generally, no taxes are withheld from that income, and at tax time, your broker will report your income on IRS Form 1099-NEC. For income tax purposes, the income reported on this form will represent your gross income, which will be reported on Schedule C of your federal income tax return. You will also be able to deduct expenses directly related to your business from your gross income to arrive at your net income.

Since income tax is not withheld, it’s important to remember to make quarterly estimated tax payments. Income tax is a “pay as you go” tax, so quarterly estimated tax payments are required, in general, if you think you are going to owe $1,000 or more in taxes.

Tax Deductible Business Expenses

One of the advantages you have in being self-employed is the number of tax-deductible business expenses you can take.

Typical expenses for a real estate agent include:

• Training and licensing expenses.
• Auto expenses for business use of your car in connection with your real estate sales activity. You can use either actual expense or the IRS business mileage allowance of 67 cents per mile for 2024.
• Marketing and advertising costs you pay directly in the sale of any properties.
• Travel (if you attend any work-related out-of-town conventions, training sessions, or conferences).
• Meals you pay for when meeting with clients for business purposes. Under IRS guidelines, you can deduct 50% of the cost of business-related meals.
• Home office deduction for home expenses based on the percentage of space used for your office if you work out of your home. For example, if you have a home office that represents 10% of the square footage in your home, you’ll be able to deduct 10% of home costs like mortgage interest, property taxes, rent, and utilities.
• The purchase of office equipment, such as a dedicated business computer, printer, smartphone, or fax machine.
• Internet and cell phone expenses.

Self-Employment Tax

Since you’re now self-employed, your income will be subject to the self-employment tax. The self-employment tax rate is 15.3%, but it applies to your net business income, not the gross income reported on your 1099-NEC.

For example, if your 1099-NEC shows $30,000 in gross income but you have $10,000 in business expenses, your net income will be $20,000. That’s the amount that will be subject to the self-employment tax.

Fortunately, you can deduct half of the self-employment tax as a reduction to your income for federal income tax purposes.

Self-Employed Retirement Contributions

Self-employed retirement contributions are another way to reduce your taxable income. While it won’t reduce your income for the self-employment tax calculation, it does reduce it for federal income tax purposes.

Contributions made to a retirement plan may be tax-deductible. The most basic plan is the traditional IRA, which enables you to contribute and deduct up to $7,000 ($8,000 if you’re 50 and over) in 2024 for an IRA.

But that’s only the beginning — there is another retirement plan you can use that may permit a much larger tax deduction. A SEP IRA allows you to contribute the lesser of 25% of your net income or up to $69,000 for 2024.

You can also make a 2024 contribution to a traditional IRA or a SEP-IRA up until the tax deadline and possibly lower your tax liability for 2024. Just make sure your plan administrator knows that you are making a 2024 contribution.

No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed.