According to the National Association of REALTORS®, 88% of REALTORS® are independent contractors. If you fall into this category, you may have a unique scenario that can lead to struggles with cash flow, bookkeeping and tax compliance. In fact, 87% of REALTORS® fail in the first five years, and the number one reason is poor financial health.
It’s never too late or too early to start fresh and get fiscally organized! Here are eight actionable tips to reduce finance-related stress and make tax season a breeze.
1. Understand Your Taxes as a 1099 Contractor
One of the biggest tax differences between W-2 employees and 1099 workers — like some REALTORS® — is that for the latter, federal, state, city and self-employment taxes are not withheld from paychecks. Pay attention to these tax amounts, because you will need to track and pay them separately.
Self-employment tax is currently at 15.3% on the first $147,000 of “net earnings” in 2023. The federal income tax rate varies depending on the individual’s income level and filing status. State income tax rates vary depending on the state; Illinois has a flat state income tax rate of 4.95% for 2023, which applies to all taxpayers regardless of
their income level.
As 1099 (independent) contractors, you are required to pay these taxes quarterly to avoid interest and penalties. The due dates are:
- Q1: April 18, 2023
- Q2: June 15, 2023
- Q3: September 15, 2023
- Q4: January 16, 2024
Your payment will be one-fourth of your prior year’s tax owed. If you earn over $150,000, it will be 110% of your prior year’s tax owed divided by four. Where can you look these up? Visit irs.gov.
2. Keep Personal & Business Spending Separate
When you own a business, it can be easy to mix personal and business funds. From a compliance standpoint, doing this can cause you to lose your liability protection and increase your audit failure risk. From an operational side, it becomes increasingly difficult and time-consuming to utilize spending data if you are mixing transactions.
Keep your personal and business spending separate, so you can mitigate risk and utilize data to make informed financial decisions. One crucial practice will help this along — get a business debit or credit card as well as a business checking account.
This separation will pay off come tax season when you have an organized, accurate view of your true expenses.
3. Understand What Is Deductible
One of the biggest advantages of having clean, up-to-date books is tax savings. As independent contractors, this starts with understanding what is and isn’t a business expense.
Some of the more common deductions include marketing and advertising expenses, accounting fees, education, errors and omissions insurance, legal and professional fees, business meals, rent expenses, benefits, and utilities. The two largest deductions REALTORS® take advantage of are mileage and home office.
Mileage can be tracked most efficiently by using an app such as Mile IQ. Commuting between work and home is considered personal mileage by the IRS, but anything related to meetings with clients, traveling to secondary work sites or running errands to pick up supplies will count. Only those who have a home office as their principal place of business can deduct mileage when driving to and from home for business-related purposes.
Find Your Mileage Deduction Rates
Didn’t do your taxes quarterly last year? According to the IRS, here’s a breakdown of how your mileage is deductible:
- Mileage between January 1 and June 30, 2022 is deductible at 58.5 cents per mile.
- Mileage between July 1 to December 31, 2022 is deductible at 62.5 cents per mile.
If you’re filing quarterly, 2023 mileage is deductible at 65.5 cents per mile.
Home Office Deduction
If your primary place of business is a home office for one of your business activities, you may qualify for the home office deduction. Your home office space must be used exclusively for business. Consult with your tax advisor for more information.
4. Ditch the Spreadsheets
It’s time to scrap the spreadsheets! They are time-consuming, lack accounting fundamentals and are difficult to defend under audit. Instead, replace spreadsheets with cloud accounting software like Symba, QuickBooks Online or Xero.
Cloud accounting software automatically connects to your bank feed and categorizes transactions. You can even create “rules” for the software to automatically categorize recurring transactions. Should you ever face an audit, this tool comes with out-of-the-box accounting fundamentals like linking receipt images to each transaction.
Or, if your business can support it, hire a professional bookkeeper. They charge a monthly fee based on the volume of transactions and complexity of your business.
5. Make Quarterly Tax Payments
Adopt a quarterly tax payment schedule to avoid penalties and accruing interest from waiting until the end of the year. It’s easier to budget and keep your business in better financial standing when you spread out your income tax payments throughout the year.
As a best practice, set aside money from each closed transaction. Using a product like Symba will help make these estimates easier, but a safe estimate for setting taxes aside is 15% to 30% of your gross income. If you expect to make a similar amount of money as the previous year, you could look at last year’s tax owed and divide it by four.
Making quarterly tax payments can be easy. Federal taxes can be paid online through the Electronic Federal Tax Payment System (EFTPS) where you can schedule payments in advance; it also provides a record of payment history.
Many states — Illinois included — now allow independent contractors to pay their state income taxes online through the state’s Department of Revenue website. Some states also allow payments through third party processors, such as TurboTax or H&R Block. The due date for quarterly state income taxes varies by state, but it is usually around the same time as the federal quarterly due dates. Check with your state’s Department of Revenue for specific due dates and filing requirements.
6. Set Key Performance Indicators (KPIs)
Depending on your goals, the KPIs you use to track progress are essential. Spend time at the beginning of the year thinking about what will be important for your business to take that next step. Maybe you’re looking to increase profitability per client, increase total sales volume, decrease the cost to acquire a client or decrease debt. Whatever you decide to track, clean bookkeeping will help you use these KPIs to make good business decisions. For instance, you likely can’t increase total sales volume without spending more on marketing, meals or gas. If you aren’t taking care of your bookkeeping, how will you know how much more you spent to increase sales?
7. Create a Budget
The real estate industry, by nature, is seasonal. Your income fluctuates based on commissions, making it important to create a budget to stay financially stable. A budget will help you plan for slow periods, track expenses and account for taxes. Here’s how to build one that will work for you.
- First, find your average monthly income. Look at your income over a period of several months and take the average — this gives you a starting number to work with.
- Next, create line items for tracked expenses like marketing costs, office expenses and any other costs associated with running your business. Then, you can see where your money is going and adjust as needed.
- Taxes are an important budget consideration. Set aside money for taxes as a specific line item.
- Preparing for slow periods is another important aspect of building your budget. Increase savings during high production times to use during slower times.
- Finally, utilize budgeting tools and bookkeeping apps to stay on track with your budget.
8. Find A Good CPA
When your business can afford it, we recommend finding a good CPA to ensure compliance with tax laws and to help maximize tax deductions. A CPA can also provide insight into smart future planning. For instance, how can you optimize your tax deductions? How can you set up your business for maximum tax efficiency? How can you properly classify your real estate business as a sole proprietorship, partnership, LLC or corporation?
Ask colleagues and other real estate professionals for referrals or search the American Institute of Certified Public Accountants (AICPA) database. Most importantly, choose a CPA who has expertise in real estate and understands the unique issues that you face.
By implementing these eight practices in your business, you’ll be able to make more money and find longevity in the industry!