Over the course of my career, I’ve had the opportunity to meet and work with countless real estate agents. The situations are as unique as the individuals. I’ve seen agents succeed greatly, and I’ve also seen agents struggle with the “business” side of their job.
As a 1099 agent, you are a business in the eyes of the government. Because of that, there are certain things you should know and do. But they aren’t always common knowledge.
In this list, I’ve handpicked the 10 most important things for you that I’ve learned over my career. I’ve worked in a real estate brokerage, I’ve done bookkeeping for Realtors® and I’ve prepared taxes for Realtors®. So I’ve worked with agents in many different capacities.
Here is what you should know:
1 – Use a separate bank account for business
It is important to use a bank account for business that is separate from your personal bank account. Use your business bank account for anything that’s business-related.
2 – Keep personal and business expenses separate
This goes along with item number 1, but it’s so important, I feel it’s worth mentioning twice. Don’t mix the two. Don’t take personal expenses out of your business account, and don’t take business expenses out of your personal. Mixing them up can make it a huge headache when you’re reviewing your records come tax time.
Protip: If you need money from your business bank account for personal expenses, then transfer the money from your business account and put it into your personal account. Then take the expense out of your personal account. Likewise, if you are low on funds in your business bank account and need to incur some more business expenses, then transfer money into the business bank account from your personal and take the business expenses out of there.
3 – Keep financial records
If you’re just starting out, then hiring a professional for regular help probably isn’t needed quite yet: you can probably do it yourself. But if you’re a little more advanced, consider hiring a full-time bookkeeper.
If you do it yourself, you will want to focus mostly on tracking your income and expenses, especially when you are first getting started. Why? Here are a few reasons:
- It helps you track progress towards your goals (see item #10)
- You need them to prepare financial statements and make business decisions
- They’re a must for filing taxes, anyways
- They help you spot fraud when you’re looking at things regularly
There are three main ways to keep track of your business income and expenses:
- Keep track on an Excel spreadsheet, or paper
Pros: Free, keeps you in the details so you know what’s going on
Cons: Time-consuming, higher potential to be inaccurate
- Use an accounting software like QuickBooks
Pros: Higher accuracy, good for reports and taxes, can include receipt tracking; can outsource to a professional. Frees up time to spend on business; tax time is easier
Cons: Accounting software can have a learning curve; cost to outsource if you choose; often subscription based
- Do nothing. This is not a good option. And I don’t recommend it because you’ll pay for it later in one way or another. Panicking is usually involved down the road.
4 – Understand your tax basics
As a self-employed individual, you will end up paying more in taxes. So it’s important to know a few things upfront.
You’ll end up paying 3 different taxes on your commissions:
- Federal Income Tax – this tax is on assessed on your yearly 1040 tax form and goes to the IRS.
- State Income Tax – this tax is also assessed on your yearly tax return and is state specific to where you earned the money, like Utah. This tax goes to the state.
- Self Employment Tax – this tax is not called an income tax like the other two, even though it is on your income. This tax is also known as the payroll tax and is 15.3% of your income, in addition to the income taxes.
As you can see, it’s really easy to get hit with a lot of taxes on your commissions. You need to be aware of this so you can plan for it ahead of time.
Note: When you have a traditional W-2 job, you pay half of the payroll taxes and your employer pays the other half, without you even seeing it on your paycheck. But as a 1099 individual, you are both employee and employer, so you get to pay both sides.
Protip: Designating your business as an S-corp can help shelter your income from the self employment tax. There is a bit of upkeep with an S-corp, since you have to file payroll and complete an extra tax return. But if you are making a profit of at least $10-15k each year, then the S-Corp option could be the right option for you. Talk to your tax professional.
5 – Learn up on tax deductions
Generally, if an expense is related to your business in any way, then it is probably a tax write off.
Here are some of the major tax deduction categories for real estate agents:
- Mileage – Keep a mileage log! This is a gigantic deduction for agents. Your wallet will thank you at tax time.
- Advertising – This is generally a big expense for Realtors® because you have to advertise yourself constantly.
- Real estate dues & continuing education – This is another big one for Realtors®. Agents are always looking to improve themselves in one way or another like seminars, courses, events attended. These can typically be taken as a write off at tax time.
- Cell phone & internet – You couldn’t do your job without them, so they can be classified as a legitimate business expense.
- Travel – If you go on a trip for business, then generally you can take all or part of it as a tax write off. That doesn’t mean you can’t do some personal stuff on the trip, as long as you can show that the main purpose of the trip is business-related.
- Subscriptions – Do you listen to audiobooks while you drive to and from your showings? If so, it can often be a write off.
This is not an all inclusive list. These are just the major categories for Realtors®. You will want to get in the habit of asking yourself if an expense is business-related in any way. If it is, then take it out of your business bank account, and ask your tax professional if you can write it off.
6 – Setup an LLC with the State of Utah, and get an EIN from the IRS
Having an LLC and an EIN is a good way to manage your tax situation well from the get-go. Your 1099 can be issued to your EIN instead of your Social Security Number. And the biggest benefit is the potential to have your business taxed as an S-Corp. There are tax savings to this. But you must have the LLC and EIN first.
I strongly recommend you just get your LLC and EIN from the very beginning. I have seen so many agents who put off getting their LLC & EIN, and they always overpay in taxes. This is the biggest thing I wish every new agent knew and did. You will be glad you did. Consult with your legal or tax professional if you have any questions.
Protip: Update your W-9 with your brokerage once you get an EIN so they can issue your 1099 to your EIN instead of your Social Security Number. This will help keep your SSN secure.
7 – Keep your business receipts
Bank statements usually aren’t enough. You have to keep your receipts in case of a tax audit. It’s up to you on how you want to save them. I recommend you write your business purpose on the receipt and save them to a digital location, like Dropbox or Google Drive. Even a simple shoebox would also work.
Question: What’s a “business purpose”?
Answer: This is your business-related reason for incurring the given expense. Example: Vistaprint was a business expense because you were purchasing business cards. If there is no legitimate business purpose, then be honest, and don’t call it a business expense!
Question: Help, I haven’t kept any receipts!
Answer: Start now. Gather what you can from the past. And even if you can’t find all your old receipts, I recommend you still keep track of these expenses and talk to your tax professional about what can or can’t be taken as a deduction.
8 – Learn some basic accounting terms
I have an accounting equation I want you to memorize. It’s easy. Here it is:
COMMISSIONS – EXPENSES = NET INCOME
Or, in other terms:
INCOME – EXPENSES = NET INCOME
You need to know what net income is as it’ll pop up when you talk to your accounting and tax professionals. Net income is what you are really shooting for in your business, because if you make a bunch of money, but spend it all, are you really coming out ahead?
9 – Don’t underestimate the importance of savings
It’s important to save some of the money you earn. Things will come up and it’s good to have a reserve.
First, I recommend you save 20% of each commission in a savings account for taxes. Have a savings account just for taxes. Put a chunk from each commission in there and don’t touch it. Even though it’s in your bank account, it’s not yours. That money is to keep Uncle Sam off your back when April 15th hits.
Second, save for yourself. Build up an emergency fund. Start with $1-2k, then build up a 6-12 month emergency fund. The real estate industry has its ups and downs. You won’t get paid every 2 weeks like a standard 9-5 job. Commissions may flow, but then they may stop. Build up a cushion of cash so that when things dry up for a time, you don’t have to take out loans or credit cards to make ends meet.
10 – Set SMART goals and work towards them
Goals propel us towards your dreams. Without goals, dreams remain dreams. You got into real estate for a reason. What’s that reason? Ok, now how are you going to achieve those dreams you have? Write it down. Good: that’s your goal.
Create SMART goals:
S – Specific – spell out exactly what you want to achieve
M – Measurable – you should be able to figure out exactly how close you are
A – Attainable – it should stretch you, but still be attainable
R – Relevant – it should be your goal, not someone else’s goal
T – Timely – put a time limit on it and get the “Procrastination Monkey” off your back
11 (Bonus) – Use my financial tracking Excel doc
As a thank you for reading this far, I’d like to offer you my free business finance organizer. It’s an Excel doc that helps you organize your business income and expenses each month. Financial records are a big part of goal tracking, record keeping, and taxes.
I recommend that you go through your bank statement monthly, add up your income and expenses, and put them in the organizer. This will give you a complete picture of your business, including info on your net income, and your progress towards your goals. And of course it will make tax time easier. Don’t put it off.
I am excited that you’ve started on this journey. If you do the things I’ve recommended, I know you’ll save yourself a lot of time, stress, and money down the road.
I wish you the best! Feel free to contact me with any questions.
Samantha Jones
Email: Samantha@SageMountainAccounting.com
Website: SageMountainAccounting.com