Stop Paying Taxes You Don't Have To Pay!
One would think that every real estate professional - every business person - no, every person would wish to pay the lowest amount of taxes that they can possibly pay. We all want to pay our "fair share" of tax burdens to fund our collective goods - common defense, promote the general welfare and secure the blessings of liberty to ourselves and our posterity (you know how it goes!). But I have been amazed at the number of Realtors I encounter that do not pay their income taxes as the year goes on. As a business owner, I know that I must pay estimated taxes on my business earnings (on top of my payroll taxes that I pay each month). But so many Realtors wait until the end of the year to pay taxes. And this is costing them - dearly!
Taxes are "Pay-As-You-Go"
As independent contractors, Realtor earnings are reported to the IRS in January each year - but the money is earned throughout the year. As the money is earned, at least two types of taxes are incurred:
1) Self employment taxes - these are taxes for your Medicare and Social Security insurance accounts, totalling 15.3% of the net income for your business
2) Federal Income Taxes - these are income taxes on your earnings and will be based on your tax bracket and deductions. More than likely, the rates are between 12% and 32%.
If your state has state income taxes, it is possible that you have a liability for that as well.
If you are a Realtor who chooses to wait until the following year to pay your taxes, you are voluntarily choosing to pay more to the IRS than you have to. The IRS requires requires that individuals and businesses "pay-as-you-go" their tax obligations. If you fail to pay the smaller of 100% of the prior year's tax liability or 90% of the current year's tax liabilty, you will have an underpayment of taxes. That underpayment will be subject to a TAX PENALTY of as much as 2.7% of the amount of the underpayment. Essentially, Realtors who choose to wait are choosing to pay the IRS more than they must.
How to Avoid Overpaying Taxes
There are two simple steps to ensure that you do not overpay your taxes:
1) Reserve a portion of each of your commission checks for future tax payments - it is likely to be in the range of 30 - 40% of your commissions. Open a separate bank account to hold the funds, if that is the sort of discipline you need to make this happen.
2) Pay estimated taxes by the IRS deadlines in each quarter of the year (April 15, June 15, September 15, January 15). Doing so will limit the likelihood of paying underpayment penalties when you file your annual tax return each year. You can pay the estimated taxes by check or use the IRS's very easy (and secure) EFTPS system online to make an electronic payment. (You will need to register for the EFTPS service well ahead of the tax deadline in order to use it - but once you're signed up, you will never go back!)
How much can you save in taxes? Well, a single person with modest income ($80,000/year after deductions) will save $729 in penalties, just by paying quarterly. Bottom line - it's worth it!
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