Real Estate Agents: The Tax Story

“Gig economy” has become something of a buzzword — slang for what is formally known as the “independent contractor” model. But are you an employee or are you in business for yourself? Sometimes it may seem like a thin line between the two: What kind of affiliation is employer-employee rather than a less restrictive arrangement?

The IRS is strict, and real estate agents need to understand how they’re classified and what that means for their tax situation. There are various opportunities and responsibilities in both the employee and independent contractor models.

How do real estate agents work?

Most licensed real estate agents are independent contractors, assuming they are paid by commission — as is typical — and not by the hour. That means they are responsible for remitting all income taxes, which — unlike the case for actual employees — will not be automatically withheld. Each year as a real estate agent, you will receive a Form 1099 from any firms you have done business with, showing how much you’ve made in commissions.

Agents should talk to a tax professional about submitting their taxes quarterly so they don’t have to pay a large amount at one time. This large one-time payment not only is inconvenient but also may be illegal, subjecting the agents to an underpayment penalty.

Can you take deductions?

Focusing on the positive, however, agents should know that they can take deductions that reduce their taxable income. The key is knowing what those deductions are and keeping good records.

  • Commissions to others. Not only do you receive commissions, but you may pay them to others in the course of making a sale. These sub-commissions are tax deductible.
  • Home office. If you work out of your home, you may be able to take a portion of your rent or mortgage as a tax deduction. This can be fairly complex — the IRS uses some strict definitions. However, it’s worth exploring, as it can add up to big savings.
  • Automobile expenses. This is special. Generally, commuting expenses are not tax deductible, but general business travel is. So, keep track of your expenses as you go from house to house as part of your business as an agent. These will likely be tax deductible.
  • Education and training. The IRS draws a fine line here, but agents should be able to get something out of it. According to the IRS, to be tax deductible, expenses must be for education that maintains or improves the skills needed in your present job. You cannot deduct the costs of education to start a new profession. So, if you are already an agent and take a course to improve your sales skills, that’s probably a deduction.
  • Licensing fees. You, as an agent, may deduct renewal fees for your state license, the cost of professional memberships, and your MLS dues.

How should you practice?

Finally, getting into advanced topics, you may want to consider what format your real estate practice should take. The default is a sole proprietorship, and that’s perfectly legal, but other options are available. For example, many real estate agents are set up as a limited liability company to protect their assets.

Also, there may be a tax advantage; you can elect to have your LLC taxed as an S corporation, which can result in savings: With an S corporation, you become an employee of your corporation and pay yourself a salary out of the profits. However, these are complicated decisions, and you should get legal and financial advice.

Indeed, this article is just a summary of intricate tax laws, which often have subtle provisions and can frequently change. Also, each state has its own rules. So, no matter your situation, make us and a lawyer de facto partners in your business — you won’t regret it.