How Are Real Estate Agents Taxed?
Yes, I know taxes are not a sexy topic. I even debated whether I should write this blog or not. But, as non-sexy as taxes are, you have to pay them, so you might as well know how they work and how you can avoid the insanely massive mistake I made (I’ll explain later).
When it comes to being taxed, the first thing you need to understand is that you are not an employee. As I mentioned in my blog How Much Does it Cost to be a Real Estate Agent?, which you can read HERE, real estate agents are considered independent contractors, which means you are taxed very differently from someone who gets paid by a company.
1099 vs W-2
So, you want to be an independent contractor. Well, you are now considered a 1099 by the Government. 1099 basically means that you do not have any taxes taken out of your commissions and are given the full amount (if you’re interested in learning more about 1099s, you can visit the IRS website HERE). For example, when you receive a commission payment from your brokerage, you will receive the full amount after any brokerage fees and your split, but will not have any state and federal taxes, social security, or anything else taken out. You just get a large number that makes you feel good for a moment, and forget what’s waiting for you at tax time.
For comparison, if you have ever received a check as an employee, you know that the amount deposited into your account is not the actual amount you were paid for those two weeks. Your company has already taken out all of the taxes and paid them on your behalf. How nice of them! So come tax time, you have already paid what you owe and then some, which is why, as an employee, you are given refunds at tax time.
On the flip side, as a real estate agent, you will, more often than not, have to actually pay taxes.
But, before you flip out, there is something you can do to help make sure that if you do owe, it will be more manageable.
Quarterly Tax Payments
If you want to avoid having a massive tax bill on April 15th, one of the best things you can do is make quarterly tax payments throughout the year. These are estimated payments you make for both state and federal taxes based on what you expect to have to pay. For example, if you expect to make $100,000 and fall into the 22% tax bracket (the brackets typically do not change, but the income for each varies based on inflation, so make sure you keep an eye on these when the Government announces them), you can expect to pay roughly $22,000 in taxes. Knowing this, you can plan to make $5,500 in estimated payments throughout the year, so come tax time, you won’t have to owe this amount all at once. Like I did.
Let me tell you a story. In 2018 (the last year I was selling full-time), I had my best year in real estate and won a top producer award. That year, I made well over $200,000 in income and was on cloud nine after accepting my award, since I finally achieved my main goal as a sales agent. But my joy was short-lived. About a month later, I was driving home after leaving the office late, when I received a call from my accountant. My accountant never calls me that, so I was super confused why he was. Normally, he is a joyful person and greets me with “what’s happening,” but this time, in a more straightforward tone, he just asked me if I was sitting down. I told him I was driving and asked him to tell me what’s up. After a pause, he said, “You owe $50,000 in taxes.” A minute of explanation, and we hung up. Knowing I needed to stop driving to process what I was just told, I pulled into a White Castle parking lot five minutes from my house. For the next 30+ minutes, I cried uncontrollably. The whole time thinking, how the hell am I ever going to explain this to my wife?
You see, although I was making my quarterly tax payments like I mentioned earlier, I wasn’t making anywhere near enough for the amount of income I was bringing in. So come tax time, our tax bill was massive. It took us a while to finally pay it off, and since then, we have always made our payments based on what we are making at that time.
So don’t make my mistake. Speak to your accountant and get ahead of how you will make your quarterly tax payments. This way, you know what to do before you start earning income, and you won’t have to stare at a White Castle while you try to control the flood of tears pouring out of your eyes.
I hope this makes sense. If not, please leave a comment so I can explain it more clearly for you.
“It is never too late to be what you might have been.” —George Eliot
P.S. IF you are serious about becoming a real estate agent and want to learn how you can avoid the mistakes 87% of new agents make, I encourage you to check out the coaching program I have developed to help agents before they enter the industry. The program is designed to help you avoid the frustrations I and so many other agents felt when entering the industry, struggling to survive while clinging to the belief we will succeed. It is completely based on proven results from my experience as a top-producing agent, owning a brokerage for almost a decade (where I helped agents average 2x4 times the amount of sales and income), and from spending over 25,000 hours learning from history’s most legendary people! If this sounds like something that would benefit you, please click HERE to set up a FREE 30 Minute Virtual Call to learn more about how I can help you.