For most people, tax time is not something to look forward to. And for self-employed professionals like you, it can be downright terrifying.
Because unless you’re paying taxes throughout the year, you’ll be paying the government a hefty sum in mid-April. And if you don’t have systems in place to ensure you’re saving enough, that hefty sum may be well over what you’re prepared to pay.
It can be thousands of dollars more if you don’t know what you can write off as tax-deductible business expenses.
We’ve been there, and we know firsthand the stress that comes with tax season. So we went out and got advice from the experts in the field—read on to learn how financially savvy real estate agents prepare for a low-stress tax season every year.
The Biggest Mistakes Agents Make during Tax Season
No discussion on taxes for real estate agents would be complete without an overview of the biggest mistakes agents make during tax season. We cover this first, so you can identify which mistakes you’ve made—or are still making every year.
#1—Filing taxes yourself
If you’ve been working as a real estate agent long enough, you know filing as a self-employed business owner is less straightforward than filing as a W-2 employee. And just hoping your standard deductions will keep you in the green is not a strategy.
Even if you think you’ve got it covered, you probably don’t. Marcus Edgette, Manager of Professional Services (Tax) at Formations, shared that over 90% of the DIY tax returns he’s seen are missing something—and leaving money on the table.
Even more disturbing, self-employed professionals are overpaying roughly $8,400 a year on federal and state taxes, according to Formations.
That’s why Shahar Plinner and Uri Bar-Joseph founded Formations—to help self-employed professionals pay as little in taxes as (legally) possible.
If you’re wondering how much you could save on your taxes, Formations provides an online calculator you can use to predict your tax savings for the year.
#2—Not saving enough to cover taxes throughout the year
If you’re not preparing for tax time throughout the year by saving money every month to a tax savings account, you have good reason to be nervous about tax time. This is a major reason many self-employed individuals avoid doing their taxes—often until the last minute.
When you start putting a percentage of each payment into a tax savings account—an account you do not use for anything but taxes—you feel more prepared for tax season, especially when you’re also making regular payments to the IRS during the year.
#3—Not switching to an LLC or S-Corp to reap the maximum tax benefits
Your entity structure can have a tremendous impact on your tax liability. If you’re still operating and filing as a sole proprietorship, you’re missing out on the tax benefits that go with switching to an LLC.
More than 60% of full-time self-employed individuals are unincorporated. When you incorporate, you are no longer personally liable for your company’s debts or liabilities.
As the Formations team recommends, “At the very least, you should be incorporated as an LLC so you can have legal protection.” But if you need more convincing, check out the difference in self-employment tax between someone operating as a sole-proprietor versus an S-Corp:
#4—Not leveraging retirement contributions to reduce your tax liability
Did you know you can leverage the retirement savings you’ve put aside during the year to reduce the amount you owe? If the answer to that one is “Nope, didn’t know that,” you’re not alone. This is another reason not to file your own taxes.
You may have no idea how much you’ve overpaid in taxes already since starting out as a self-employed professional. If you’re making regular contributions to your retirement or health savings, you can use that at tax time.
And consulting with experienced and motivated professionals with deep insight into the U.S. tax system can only help you save more of the money you earn.
How much would you be willing to pay someone who saved you an extra $8,000 a year?
#5—Not knowing what you can write off as business expenses
This is one of the biggest reasons not to go with the DIY approach to filing your taxes. If you don’t know, for example, that you can claim work-related expenses—things like gas, mileage, maintenance for your car, office equipment you’ve purchased for work or even a phone you bought that you use only for work—you’re paying too much in taxes.
And that’s money you can reinvest or put toward other things you need.
This is another reason to talk to a licensed professional who can separate the deductibles from the non-deductibles. To get started, check out “The Formations Guide to Expenses.”
How to Make the Most of Your Next Tax Filing
Now that you know the biggest mistakes agents make with their tax filings, you have a better idea of what you need to do to make the most of the next tax season.
#1—Make sure you’re taking advantage of all the deductions available to you
That can include expenses related to a home office, the car you use for work, a dedicated work phone, and any expenses related to your work. What it typically does not include, as mentioned in this BAM financial panel, are costs associated with your hair or professional wardrobe.
The IRS doesn’t care if you only wear those expensive suits when you’re working; unless it’s actually a work uniform (i.e., something that would be inappropriate anywhere else), it’s not a tax write-off.
An accountant can help you maximize your tax savings and set up systems that will increase your savings—and reduce your tax-related stress—every year.
#2—Check your entity structure and filing election
This is something you’ll do each year to make sure you’re in the most tax-advantaged structure for your state and income level.
If you’ve been operating as a sole proprietorship, now is the time to incorporate as an LLC. If you’ve already incorporated as an LLC and you’re not sure whether it would be advantageous to switch to an S-Corp, talk to a professional who can assess your situation and explain the pros and cons.
To learn more about what it means to be an S-Corp, check out “A Real Estate Agent’s Guide to Running an S-Corp” or read up on “Why S-Corps Are Better Than LLCs.”
#3—Leverage your retirement contributions
Every dollar you put toward your retirement savings can reduce your tax liability. Taking advantage of this keeps the money on your side and gets your money working for you.
A tax professional can identify the types of retirement contributions that are tax-deductible so you don’t end up overpaying. You can then decide whether to divert those savings to your retirement account or reinvest them in your business.
#4—Stop over-expensing and spending money you won’t get back
Yes, you can claim expenses like taking a client out for lunch or for drinks. But knowing you can expense something doesn’t mean you’re making the best use of your money.
Also, when you’re busy spending money to treat a client—or potential client—it’s too easy to spend money you won’t get back (especially when alcohol is involved).
You don’t have to compromise your financial well-being (personal or professional) to build trust. Focus on sustainable ways to show your appreciation for your clients and prospects, and your ability to treat them after a successful transaction will likely increase.
Plus, you’re far less likely to put yourself in a situation where you need to draw from your tax savings to cover basic necessities.
Set Yourself Up for Success Now for Next Year’s Filing
When you have a system in place, tax season becomes much simpler. If you implement these strategies now, you’ll be thanking yourself next year.
#1—Set up an account system
For every self-employed professional, having an account system set up to make saving automatic is essential. The “I’ll save whatever is left” approach doesn’t work.
As Byron Lazine explains in this video, as well as in the BAM financial panel, you need to have—at minimum—the following bank accounts set up:
- Business commission (checking) account—where all commissions go by direct deposit before percentages are diverted to the next three
- Business checking account—for business-related expenses; alternatively, you can call this your Business Investment account
- Personal/household checking account—for all your personal/household expenses
- Tax savings account—to save a percentage of every commission check to cover your tax liability (20%)
You can also set up other savings accounts, both personal and business-related, and send a percentage of each commission check to these accounts.
A good practice is to check those accounts on a daily basis, if only to see where you are with each. As Taya DiCarlo said during the BAM financial panel, “Anything you track and measure will grow.”
And when it comes to your income, savings, and ROI, growth is a good thing to see.
#2—Deposit money into a tax savings account
Ideally, this should happen automatically. Talk to your bank about having a specific percentage (around 20%) of each commission check diverted automatically from your Business Commissions account to your Tax Savings account.
That takes one thing off your to-do list and frees up headspace for things you can’t automate.
#3—Make regular monthly or quarterly tax payments using your tax savings
Making regular tax payments throughout the year helps in a few ways:
- It removes the temptation to spend that money on other things
- It makes you more conscious of your money management—which makes you a better money manager.
- It increases the likelihood of getting money back rather than owing the government when tax time rolls around
#4—Incorporate as an LLC (if you haven’t already) or switch to an S-Corp
If you’re still operating as a sole proprietorship, incorporate as an LLC as soon as you possibly can to maximize your tax benefits and protect yourself from business debts and liabilities.
If you’re already operating as an LLC, consult with a professional if you’d like to switch to an S-Corp but are unsure if it’s the right move for your business.
For more information about your finances, schedule a free personalized consultation with Formations here.