What deductions are allowable for me as a real estate agent?
Under IRS rules, you are technically allowed to deduct any expense related to your business so long as it is considered “ordinary & necessary” and can be sufficiently documented.
Common deductions for real estate agents include:
- Marketing and advertising expenses
- Training and education
- Any costs associated with professional work, including insurance, licenses, fees, and organizational membership dues
- Office equipment, supplies, software, etc.
- Vehicle mileage
- Depreciation on any durable equipment like computers, vehicles, etc. so long as these items aren’t also reported as an expense or via a mileage claim
- 50% of meals related to client or business relations
- Commissions, desk fees, and employee/freelancer compensation
- Home office
- Needed services, including phone service, internet, power, etc.
- Up to $25 for gifts related to client appreciation or business relationships
How much of my income should I set aside to cover my taxes?
The amount of income you set aside should be enough to comfortably cover your income tax rate as well as your “self-employment tax” contributions to social security and medicare. These taxes add up to 15.3% upon all net income.
Income tax rates vary according to the brackets established by the IRS for each year. Many real estate agents fall into the $40,126 – $85,525 income range, which requires $4617.50 plus 22% of the amount earned over $40,125.
Adding the two percentages yields 27.3% of net income taxed — “net income” meaning gross income minus deductions. A good rule of thumb can be to set aside 30% of gross income so that you can cover any expected tax costs plus any unplanned expenses related to filing or unexpected income, but every individual case is different. The exact amount you should set aside depends upon your estimated income adjusted for expenses, and filing jointly with your spouse can affect this calculation.
What is the best way to track my expenses?
You can track your expenses using spreadsheet software or a similar productivity tool. Categorize your expenses so that each type of expense can be accounted for separately and also because some expenses may involve a different calculation than others. For example, only 50% of meal costs can be deducted, whereas 100% of wages paid to employees or contractors can be deducted.
Each expense should have additional documentation to prepare for the event of an audit. For instance, vehicle mileage can be tracked on a weekly, monthly, or per-trip basis. A cell phone used partially for personal and business use can have its usage tracked. Individual expenses for office supplies or software licensing should be accompanied by a receipt.
Documenting every expense is the best way to reduce the chances of an audit or a penalty for unpaid taxes, while at the same time allowing you to double-check your own calculations and ensure accurate filing.