Estimating Taxes and Making Quarterly Payments as a Real Estate Agent

One of the keys to running a successful real estate business is properly estimating and making quarterly tax payments. As an independent contractor, you have unique tax obligations that require planning to avoid penalties. Read on for a guide to estimating taxes, understanding quarterly payments, and working with a tax professional to stay compliant as a real estate agent.

Calculating Estimated Taxes

The first step is estimating your expected tax bill for the coming year so you know how much to set aside for quarterly payments. Here are some tips for real estate agents:

• Review prior year's taxes - Look at your most recent tax return to see total taxes paid as a baseline. Adjust up or down based on expected changes in income and deductions.

• Estimate your net business income - Project your gross commissions and other real estate income, then subtract estimated business deductions like mileage, advertising, licenses, MLS fees, office expenses, etc. The remaining net income amount is what's taxed.

• Know your tax rates - Remember your net business income will be subject to self-employment tax of 15.3% in addition to your federal and state income tax rates. Real estate is not considered a passive activity by the IRS.

• Factor in deductions - Don't forget to account for things like real estate specific deductions, retirement plan contributions, health insurance premiums, and other write-offs that lower your taxable income.

• Use an online calculator - Plug numbers into an online self-employment tax calculator to estimate what you will owe. Account for all your potential income streams and deductions.

• Talk to your CPA - Your tax professional can help estimate your tax liability based on projected income and expenses. A CPA can ensure you calculate taxes correctly.

To avoid penalties, your quarterly payments must be at least 90% of the tax owed for the current year or 100% of the prior year's tax liability, whichever is less. Any shortage is subject to penalties and interest when filing your return.

Making Quarterly Payments

Once you estimate taxes for the coming year, divide this into four equal quarterly payments:

• Q1 due April 15th

• Q2 due June 15th

• Q3 due September 15th

• Q4 due January 15th of the following year

Each payment should cover about 25% of your estimated annual tax bill. There are several options for submitting quarterly payments:

• Pay online via IRS Direct Pay - The easiest way to make quarterly payments. You'll need your Social Security Number, bank account and routing numbers, and IRS notice or prior year tax return for reference.

• Pay by check with voucher - Complete Form 1040-ES, which provides payment vouchers to include with mailed checks. Print vouchers to include with paper checks payable to "United States Treasury" for each quarter.

• Payroll tax withholding - If married, you can adjust your W-2 job withholdings to cover the quarterly self-employment tax payments instead. This applies tax dollars already being withheld.

Adjusting Payments

It's okay to modify your quarterly payments during the year if income projections change. For example, if you have a higher than expected sales volume, increase Q3 and Q4 payments to catch up. If business is slower, reduce remaining quarters.

Just be sure to closely monitor earnings to avoid underpaying, which leads to penalties. If in doubt, consult your CPA. They can run interim calculations to ensure your quarterly payments are adequate as the year progresses.

Key Deadlines for Real Estate Agents

Mark your calendar with these important dates to remember as a real estate agent:

• January 15th - Final estimated tax payment due for prior year

• January 31st - Deadline to receive 1099 forms from brokerages and other payers

• April 15th - Income tax return due for prior year

• April 15th - First quarter estimated tax payment due

• June 15th - Second quarter estimated tax payment due

• September 15th - Third quarter estimated tax payment due

• October 15th- Extended income tax return due date

• December 31st - Deadline for deducting business expenses

Hiring a Tax Professional

Partnering with a qualified CPA who specializes in taxes for real estate agents can prove invaluable. Look for an accountant experienced in estimated payments, self-employment taxes, and the array of deductions available to real estate pros. A knowledgeable tax preparer can help ensure you pay exactly what you owe – no more, no less.

Accurately estimating and making quarterly tax payments helps real estate agents and other independent contractors stay in compliance and avoid penalties. Though it requires planning, with some diligence you can get a handle on your unique tax obligations.