How Much Should I Set Aside for Taxes as a Real Estate Agent?

“How much should I set aside for taxes as a real estate agent” is a question with several factors to take into account. This is because real estate agents are frequently considered independent agents or brokers, not salaried employees.

If you work as a real estate agent and are paid on commission, you probably fall into the "self-employed" category for tax purposes. It's always best to have a rough idea of how much tax to factor in to avoid surprises down the line.

Employee vs Self-Employed Tax Designation in Real Estate

Luckily for real estate agents, your chosen career doesn't have realtor-specific tax rules to know about. For you, the biggest question is whether you are a salaried employee or are self-employed. This distinction is crucial because it changes the type of tax you pay on your taxable income.

Being self-employed means a few things for your taxes as a real estate agent:

• You will pay self-employment taxes, which cover your contributions to Social Security and Medicare. These taxes are usually automatically deducted from employees' payroll.

• You’re obliged to pay estimated quarterly taxes. If your state collects income tax, you should also make regular estimated tax payments throughout the year to your state.

• Get to know real estate business expenses that qualify for deductions. Tax deductions and tax credits have the potential to reduce your tax liability when you file taxes.

If you own a real estate business or you're working on commission in somebody else's real estate agency, calculating your taxes can be overwhelming. This is especially the case when you're just starting out. Real estate accounting servicescan make this task easier while helping you take advantage of all the tax deductions available.

Income Tax

If you haven't actively changed your business structure, you will pay income taxes as a sole proprietor. This is important because your business structure affects how and how much you pay when filing taxes.

Filing taxes as a sole proprietor means there's no distinction between you as an individual and your business. Effectively, you are paid by your clients and you pay income tax and self-employment tax on that amount.

The IRS will automatically treat you as a sole proprietorship. However, if you elect to form an S Corp, you can separate yourself from your business. This separation may come with tax savings. 

Federal Tax Brackets

Be aware of your tax bracket and how the annual changes to threshold amounts may affect you. The 2024 federal tax brackets for income taxes are the following:

Tax Rate	Single Filers	Married Individuals Filing Joint Returns	Heads of Households
10%	$0 to $11,600	$0 to $23,200	$0 to $16,500
12%	Over $11,600 to $47,150	Over $23,200 to $94,300	Over $16,550 to $63,100
22%	Over $47,150 to $100,525	Over $94,300 to $201, 050	Over $63,100 to $100,500
24%	Over $100,525 to $191,950	Over $201,050 to $383,900	Over $100,500 to $191,950
32%	Over $191,950 to $243,725	Over $383,900 to $487,450	Over $191,950 to $243,700
35%	Over $243,725 to $609,350	Over $487,450 to $731,200	Over $243,700 to $609,350
37%	Over $609,350	Over $731,200	Over $609,350

Source: https://www.irs.gov/pub/irs-drop/rp-23-34.pdf

Self-Employment Tax

Self-employment taxes are paid on top of income tax. Self-employment tax, including Social Security and Medicare, comes to 15.3% in total. Factor in this amount of your monthly earnings for your tax bill.

To pay your self-employment tax:

• Use Form 1040-ES, Estimated Tax for Individuals to estimate how much you need to set aside for your quarterly payments.

• Self-employed workers must use Schedule C to report their income or losses on their annual tax return.

If your business is taxed as an S Corp, you don’t pay self-employment taxes on your whole income. In this instance, you pay yourself a reasonable salary and only pay self-employment tax on that portion. You would then pay income tax on the rest of the money you make in the year. 

Quarterly Estimated Tax Payments

As a sole proprietor or member of a business partnership, your income isn’t subject to tax withholding. Therefore, you’ll need to make estimated quarterly payments. 

Check out our guide on how to calculate self-employed quarterly tax, which takes you through all the steps you need to calculate and pay your quarterly estimated taxes.

Remember State Taxes

Though individual taxpayers in Florida and a handful of other states aren't liable for any state income taxes, residents in many other states are. Ask a tax planning expert to explain your state-level tax obligations.

Tax laws also tend to change frequently, and their changes can have a significant impact on how much you owe in taxes. That's why it's advisable to work with an expert in tax planning to keep you up to speed and help you make a realistic budget for taxes before you receive your bill.

The Bottom Line: What Percentage of Income Should I Set Aside for Taxes as a Real Estate Agent?

Your tax rate depends on how much you earn. Calculating your taxable income is simply a question of subtracting any deductions for which you qualify from your total annual income (including commissions). You can use IRS Form 1040-ES to predict your income and expenses.

There are two main figures you need to know:

• Your self-employment tax: 15.3%

• Your income tax rate: Between 10 and 37% depending on your income

You're also liable for any state income tax your state collects.

Don’t Get Bogged Down by Tax Affairs this Tax Season

Filing your taxes as a real estate agent can be overwhelming and time-consuming if you face the task alone. It can also be stressful if you’re not sure you’ve followed all the steps correctly.

To avoid mistakes when filing taxes, and to optimize your tax return, partner with a tax professional. A tax professional can take away the burden of calculating taxes, leaving you free to focus on what’s most important: growing your real estate business.