Tax Tips for Realtors

As a real estate agent, you are an independent contractor. When you receive a commission, your broker may take a cut of your total compensation. However, the broker will not withhold any funds to pay for your federal tax liability. This means that you very well could face a substantial tax payment due on tax day if you do not take steps to properly plan for this expense. These tips will help you to better prepare your finances.

Take Full Advantage of Deductions

Because you are an independent contractor, you can deduct a wide range of expenses to directly offset your tax liability. For example, you can set up a home office, and you can deduct a portion of your home expenses, such as Internet service, utilities and more. You can also deduct your cell phone if it is used solely for business. Your business mileage as well as technology expenses, marketing expenses and more can also offset your taxes. You must learn about tax deductions and maintain proper records throughout the year to claim the tax deductions.

Estimate Your Tax Liability Each Year

Savvy real estate agents will take time at the beginning of each year to estimate their tax liability. There are powerful online calculators that you can use to estimate your tax liability. You can also create a mock tax return using estimated figures to estimate your taxes due. Your estimate can change throughout the year based on your actual income earned, so be sure to create new estimations every quarter. This will help to ensure that you are saving enough money to pay your tax bill when it is due.

Allocate a Portion of Each Commission Toward Taxes

Unless you have a hefty savings account to draw from, it makes sense to allocate a portion of each commission you receive to pay your tax bill. By saving a small amount regularly, you can decrease the financial burden that you may feel when the tax date looms in the near future.

Many real estate agents face a tax bill that equates to thousands or even tens of thousands of dollars at the end of each year. This significant bill can be a true nightmare to contend with if you have not properly prepared for it. By following these helpful tax tips for real estate agents, you can minimize your tax bill and make plans to pay for it.

William Doonan is a tax law and legal expert in New York.