Self-employment tax (SE Tax) is a combination of Medicare and Social Security Tax paid out by people who qualify as self-employed. The W2 employed pay half of this tax on their paycheck throughout the year. But for the self-employed, you cough up the SE Tax after processing taxes for the year. A lack of understanding if you’re paying too much and not taking advantage of tax deductions for real estate agents can hurt your finances in the long run. Real estate agents fall under the category of self-employed, which is why many will budget for their tax payment throughout the year.
Another preparation that successful real estate agents never pass by is tracking their expenditures and bills to deduct from their tax payment when they file. Startup expenses, advertising, continued education, travel & automobile expenses can all be counted as deductions on our tax return. Even a percentage of our cell phone might be deductible. The most prominent tax deductions for real estate agents are the home office deduction and the travel deductions. For a comprehensive list, read this.
Calculating SE Tax
Before even calculating deductions you should calculate your SE Tax payment. To do this, start with projecting your yearly income on the job. Take last year’s earnings and compare, if things are going the same way as last year then use that number. Once you have the amount, multiply it by 0.153 to calculate the SE tax payment at the Federal rate of 15.3%. From there, there is a self-employment tax deduction of 50%.
So, calculating the SE Tax would look like this:
(Yearly Earnings x 0.153)/2 = SE Tax
The number that you produce from that equation is the starting number for your SE Tax before deductions.
Home Office Deduction
First and foremost a home office can only be deducted if it is used absolutely exclusively for the business. To begin with the home office deduction you should fill out IRS Form 8829, but for those operating in an office space under 300 square feet, there is another option. The IRS lets those who want to deduct $5 per square foot, the caveat is that it caps out at $1500.
After this, you should take a look at the rules to claim your home as a home office:
- You meet clients at home.
- A separate structure on your property is used as an office.
- You exclusively use your home for business and have no other fixed location for this.
- Your principal place of business is in your home office.
If all of these or even just one of these apply, then you’re officially set to deduct your home office, and expenses therein, from your SE Tax payment.
Travel & Mileage
Agents very frequently find themselves driving clients all over town, floating through rush hour traffic to put up or take down signs, bustling around for open houses, and more. Basically, driving around town is just a part of the job. In 2018 the tax deduction was $0.58 per mile on business travel.
To get the biggest deduction we need to track our mileage when going to meet clients, pick up supplies, drive from the office to the brokerage, etc. The IRS does have specifications for logging business miles, they’ll need:
- Date of travel
- Places you drove
- The business purpose of the trip
Some agents also track their gas mileage to maximize their travel deduction, but the gasoline log and mileage log aren’t exactly the same. For those looking to apply the gas deduction, be sure to keep all gasoline receipts in case the IRS decides to audit you.
Once we’ve calculated our prospective tax payment we should also take a look at what deductions we might be aiming for. Don’t pay too much, be prepared and apply all relevant tax deductions for real estate agents.
For more helpful tax tips, read the 5 Costly Tax Mistakes Real Estates Agents Make.