As Tax Day draws near, millions of Americans are scrambling to gather the proper information for their returns. Although much of the work is already done for W-2 workers who only need to worry about calculating deductions, real estate agents will have to take extra steps to make sure Uncle Sam gets what’s due.
Oklahoma City-based lawyer and tax expert Justin Holliday sat down with Inman to explain nine, basic things agents need to know about filing accurate tax returns.
What tax forms does a real estate agent need to file?
Generally, as an independent contractor, they’ll file a Schedule C on a 1040 personal return.
What is a Schedule C? What kind of information will they need to provide?
A Schedule C is a form that attaches to a 1040 [form] where you would show the profit or loss from a business. If they have a separate business name, they’d list that business name, the business address, the business code, and those types of things.
They’re going to report all of their income and all of their expenses related to the business.
To accurately report expenses, what are some things agents need to keep track of throughout the year?
Throughout the year, there’s one thing you need to have in mind: “Recordkeeping, recordkeeping, recordkeeping.” It’s one thing to report expenses; it’s another thing to be able to verify it.
For real estate agents, [expenses] could include their marketing fund, advertising fund, business cards or anything of that nature, and travel costs. Travel is probably the biggest expense, and when I say travel, I’m talking about mileage or their automobile expenses. Realtors are driving all over the place, either to show a home or meet with a potential buyer or seller, so they need to keep track of that.
I advise all my real estate professionals to have a separate business account or business credit card that they run all business expenses through.
Let’s talk about deductions. How should agents handle them? What’s the difference between personal and business deductions?
A Schedule A [form] for personal deductions is where you’d report things such as your property taxes, state taxes held, mortgage interest that you paid, medical expenses, and charitable donations. You can take a standard deduction on your Schedule A and put your itemized business expenses on a Schedule C.
Since agents don’t have taxes withheld from their checks, how do they handle saving for tax payments?
Independent contractors are advised to make quarterly estimated tax payments that would be made to the Internal Revenue Service (IRS) or their local state tax agency. Quarterly tax payments are made in order to avoid an underpayment penalty at the end of the year. Like it says in the name, they’re estimated on where you think you’ll end up at the end of the year and paying it before you file the return.
How can agents calculate a fairly accurate quarterly estimated tax payment?
Real estate, by its nature, is challenging in the sense that income is so up and down. You could have months where you make $50,000, and you could have months where you make nothing. A rule of thumb that I use for my clients is that they plan on holding back at least 15 to 20 percent on each check.
Are there any changes in the tax code from last year to this year that agents should be aware of?
There aren’t any major ones that I’ve cautioned my real estate agents on. The big one was the Tax Cuts and Jobs Act of 2017, but that’s been in place for a couple of years now.
Hopefully, everyone has been diligent about filing their taxes. But what should agents do if they’re behind?
The first step is acknowledging that it needs to be done. A lot of people that I deal with stick their heads in the sand, and they think it’s going to go away or that it’s going to resolve itself. It takes action to get it fixed. They need to gather all tax information that they have available, and then take it to a professional to file back tax returns.
As we get closer to Tax Day, what do agents need to keep in mind?
As we get closer to the deadline, I would say if you’re not prepared, file an extension and send an estimated tax payment in with that extension. My philosophy is that it’s better to file an extension and then file a correct and accurate return than to hastily throw together a return.
The immediate concern in filing an inaccurate return would be what they’ve done to themselves. They could end up paying more than they need to or getting a smaller refund than what they’d be entitled to.
The second consequence is that in the event they’re selected for an audit with an inaccurately prepared return or a return based on poor record keeping, that severely diminishes your opportunity to win.