Failing to take your accounting seriously can lead to some big issues down the road. It’s worth taking the time to fully understand your particular tax situation and to optimize your accounting process.
- Keeping tabs on your accounting is equally important as lead gen, marketing and all the other tasks that eat up your hours as a real estate professional.
- Agents can save time and money by filing on a cash basis, separating personal and business expenses and setting aside commission money ahead of time.
As a result, accounting may not be at the forefront of your mind.
However, failing to take your accounting seriously can lead to some big issues down the road.
It’s worth taking the time to fully understand your particular tax situation and to optimize your accounting process.
Ready to get your finances in order? The following are three common mistakes that agents tend to make:
1. Choosing the wrong reporting method (hint: pay less taxes with “cash basis”)
If you’re trying to minimize your real estate agent tax payments (as most agents are!), you’ll want to consider reporting on a cash basis, which means that you only pay taxes on the income you receive during the year.
On the other hand, with the accrual method, you pay taxes on income you have earned, but not necessarily received such as commissions in escrow, thereby increasing your effective tax rate.
The point is, generally speaking, accrual basis reporting results in higher taxes for real estate agents. Tax reporting on a cash basis can be a far simpler and more cost-effective way to go.
By paying taxes on a cash basis, you only declare income on the money currently in your bank account, which means a smaller tax bill.
The IRS allows businesses to choose whether or not they want to pay their taxes on a cash or accrual basis for a given tax year. For sole proprietors (most real estate agents) you select your accounting method on Part F of Schedule C.
LLCs and other business types select their accounting method on their initial filing documents.
2. Failing to separate your personal and business accounts
Commingling your business and personal expenses is a big no-no.
By separating your business expenses, you can simplify your expense tracking and save hours spent wading through long, confusing statements.
And since it only takes 20 minutes to apply for a dedicated business card, you really have no excuse not to separate your business and personal accounts.
With a business card, you can earn cash-back, rewards and other perks for your business. Not sure where to start? Capital One and Chase have highly regarded business cards that are worth investigating.
3. Not setting aside enough for self-employment taxes
Did you know that taxes are not taken out of your commission income?
That means the onus is on you to set aside money for Tax Day.
Failing to set aside enough money for your self-employment and income taxes will cause a real headache when tax time rolls around.
Know that self-employment taxes are higher for self-employed professionals because of the “double” tax (15.3 percent) for Medicare/Social Security (W-2 employees pay only half this amount).
There are many year-end tax credits for entrepreneurs such as the self-employment tax credit.
Your accounting, like your branding, marketing and lead generation, should be a top priority. Avoiding these three mistakes will save you time, money and stress, so why not get your finances in order today?
Aaron Lesher, CPA, is part of the Customer Success and Growth team at Hurdlr in Washington, D.C. Aaron also helped create a free tax resource for self-employed entrepreneurs called 99Deductions. Follow Aaron on Twitter or connect with him on LinkedIn.