This article was originally published in Real Estate Agent Magazine Twin Cities, written by Charity Malmberg, Founder and President of Trademark Title
It’s never a fun time of year when tax season rolls around. But maybe this year (and next) will turn out to be a little bit more enjoyable after you’ve learned more about how to prepare for and get the most out of your taxes.
Figuring Out Your Tax Status
As a real estate agent, you could either be a W2 employee or considered self-employed. Th is can be confusing, especially when you are just starting out and it doesn’t feel like you’re a business owner. But whether or not you have a brick and mortar business or even a home office doesn’t necessarily affect your tax status. The best indicator is the form you receive for compensation. If you are not receiving a W2, and instead getting a 1099 or K1, then you are considered self-employed. This means you are responsible for the entirety of your FICA tax because an employer is not withholding any taxes for you. If this is you, then you’re in for an adventure when tax season rolls around. Instead of trying to figure out how to pay in without making a big dent in your wallet, consider these insights from a financial adviser on how to prepare for and fully utilize your tax status.
Tax Tips For Self-Employed
Taxes can be quite complex for someone with self-employment status. These tips will get you started in the right direction. However, this advice is not intended to take the place of an accountant or financial adviser. It’s almost always in your best interest to consult with a finance professional or certified public accountant (CPA) before you submit your taxes to be sure you’ve done everything you can to file accurately.
Be Sure You’re Setting Money Aside
An employer is not withholding taxes for you, so it’s your responsibility to withhold money yourself. This can be tricky to do if your compensation is not consistent. There are some tools and apps available, but the easiest way to do this is to make projected quarterly tax payments with a bookkeeper or CPA.
Consider Creating an LLC
An LLC is a limited liability corporation. Within this LLC, you are able to file your taxes as an S-CORP, which means you can pay yourself a distribution that is not subject to the 15.3 percent self-employment tax, more commonly known as FICA.
Take Advantage of Tax Deductions
When you’re self-employed there are dozens of ways you can save money on taxes, and taking advantage of deductions (or write-offs) is a huge part of that. If you have a CPA, they should be helping you with the actual value deductions, but it’s always wise to keep these in the back of your mind, tracking them throughout the year.
- Health insurance premiums: These are a write-off, not only for you, but for your entire family as well.
- Mileage or vehicle expenses for business use: You can either take a mileage deduction or write off general vehicle expenses, whichever is greater.
- Home office: If you utilize a space at home for work, this home office can be a deduction, calculated by the percentage of square footage it takes up in your home.
- A percentage of utility expenses (used for business): Let’s say your home office comprises 10 percent of your home. Now you can deduct 10 percent of utility expenses associated with your business.
- Misc business expenses: Meals, entertainment and other miscellaneous business expenses can be business deductions.
- The depreciation of your business property: Anything from cars to copy machines used for your business depreciate because of their use and can be a write off as well. This can be harder to calculate and should be done with the help of a CPA.
Consider hiring a CPA
As things become more and more complex with your income, business expenses and business property, it’s in your best interest to work with a CPA. Ask a business mentor or financial adviser to refer you to a respected and well-established CPA who meets the accounting, bookkeeping and tax reporting needs of your small business.