New agents are running so hard to launch their business and develop a customer base that they rarely take the time to set up their record-keeping and taxes correctly.
I've prepared over 1,000 Real Estate Agent or Broker tax returns over the past few years, and it's amazing to me how a few simple changes can save Realtors $1,000s in taxes they shouldn't have to be paying.
Here's 7 Steps for new and emerging Realtors to ensure that you keep more money in your wallet and 'share' less of your hard-earned commissions with the IRS:
- Create an LLC. Do this right out of the gate. It'll cost a few hundred dollars, but this one move can position you to save $1000's in taxes - even in your first or second year full time in real estae. And note I said "position" you; an LLC on it's own won't do it, but it's the first step. The second wll be to have your LLC "elect" S Corp "tax status" - a more costly step, and one you take down the road once your commission income achieves sufficient altitude.
- Open a separate, business-only bank account. Register it in the federal EIN or Tax ID that you get from the IRS for your new LLC. Deposit all commissions, and pay all expenses, out of this account. Don't commingle personal money and business money.
- Get QuickBooks Self Employed, and then immediately connect the bank feed to your new bank account. This way, all your real estate income and expenses will automatically feed right into your bookkeeping software. (No more chasing down scattered receipts, statements, and paperwork at tax time - it's all in there, automatically).
- Activate a GPS mileage app on your phone. QB Self Employed includes this feature. Or, some prefer MileIQ. Either way, start using it, because a mileage log is the first thing an IRS auditor will ask for should your return be subject to IRS scrutiny down the road.
- Set asid 25% of every Commission check for taxes. Shovel it out of your "operating" business account and into a separate account. Start doing this now when you're earning a little; it'll build a habit for when you're earning a lot. Don't touch this money. Except...
- Make quarterly estimated tax payments to the IRS and to your state on the quarterly payment deadlines. Send 20% to the IRS, and 5% to the state. If you set aside 25%, and pay quarterly, you'll never sweat tax time, never file late, avoid all kinds of stress and financial trouble. I've had to rescue far too many Realtors who go 3, 5 and even 15 years without filing, because they didn't set aside tax money and didn't have the self discipline to pay quarterly. It costs them hundreds of thousands of dollars in taxes and IRS penalties in the long run!!
- Hire a Real Estate TAX Coach to help you minimize tax flow, and maximize cash flow. in other words, a tax adviser, who's (a) proactive about taxes, and (b) understands the real estate industry and how to maximize deductions, credits, etc.
You already have a broker, team leader, or coach to help you MAKE money. You also need one to help you KEEP it.
If you don't know of a tax pro who specializes in working with Realtors and/or is proactive about saving on taxes with creative strategies BEFORE the ball drops in Times Square, I'm here to help.
If you have questions, I'd be happy to help you find the answers. Just call me at 757-346-1040 or contact me at email@example.com
Success to you!
Jim Flauaus, EA
Enrolled to Practice before the IRS
Real Estate Tax Coach