On the surface, a real estate agent’s job looks like guiding clients through transactions, whether it’s a first home, a commercial space, or an investment property. But behind every closing, the agent is also a business owner, with all the responsibilities that come with it. Taxes are one of the biggest. Knowing how the rules work, and where the deductions are, determine how much of each commission stays with you.
Most real estate agents are treated as independent contractors, not employees. That means you receive income via Form 1099-NEC, taxes are not withheld from your commissions, and you’re responsible for paying federal and state income tax as well as self-employment tax if applicable.
Whether you’re newly licensed or a seasoned agent, here are the most important tax tips every real estate agent should see.
TIP #1: Set aside 25–30% of your commissions for taxes
Most agents are required to make quarterly estimated tax payments throughout the year. Estimated payments are generally required if you expect to owe at least $1,000 in taxes that isn’t covered by some other source, such as withholding. Check with your tax professional to see what applies to your situation.
TIP #2: Choose the right legal and tax business structure
Choosing your business structure affects both your taxes and your personal liability. Here is an overview of the options — consult an attorney to select the best fit for your business.
- Sole Proprietor: Easy to start and no formal structure required. Simple to run, income is reported on your personal tax return, but there is no legal separation between you and the business.
- LLC: Offers legal protection for personal assets. This a legal entity classification that exists at the state level so you will need to elect to be taxed either as a sole proprietorship (single-member), partnership (multi-member), or elect to be taxed as an S corporation or C corporation.
- C Corporation: A separate taxable entity that pays corporate income tax and may result in double taxation when profits are distributed to shareholders, and requires additional administrative and filing requirements. You can elect S corporation status if double taxation is an issue.
TIP #3: Do not overlook the Home Office Deduction
If the space is used regularly and exclusively for business and serves as your principal place of business, you can deduct rent or mortgage interest, utilities, internet, property taxes, and insurance based on the office’s share of your home. Your tax professional can confirm whether your setup qualifies.
Tip #4: Track all of your Business Expenses
Common deductions include marketing, continuing education, office supplies, software subscriptions, professional services, and mileage. Track these consistently from day one to ensure you maximize your deduction amount. The easiest way to keep all records clean: run all business income and expenses through a separate bank account, and use accounting software to do the organizing.
TIP #5: Use retirement contributions to lower your tax bill.
SEP IRAs and Solo 401(k) plans can allow self-employed agents to make larger retirement contributions than a traditional or Roth IRA. Traditional SEP IRA contributions and traditional Solo 401(k) contributions reduce taxable income in the year they are made. A Roth IRA works differently: contributions are not tax deductible today, but qualified withdrawals are tax-free. Due to varying contribution limits, eligibility rules, and tax consequences, a financial advisor can help determine the retirement strategy that best fits your needs.
Final Thought
Taxes are one of your largest expenses—but there are great opportunities for savings. With the right planning, you can keep more of your commission and grow your business. The next step is getting professional eyes on your specific situation to help you understand the tax implications of different structures, maximize deductions, and stay compliant.
RLTYco, an agent services provider partnered with NextHome, works with self-employed professionals, including real estate agents, to handle tax situations under their division RLTYtax. If you aren’t sure past returns captured every deduction you were entitled to, RLTYtax offers via our partner, Block Advisors by H&R Block, a Second Look Review that re-examines your last three tax returns to find errors or missed money. If you are interested in learning more about H&R Block services, click here to make an appointment for a free consultation.