Realtors are often experts at keeping multiple matters in the air. They must handle clients, closings, listings, and showings without breaking a sweat. But one thing that can be quickly dropped is taxes. Whether it is making the dreaded quarterly payments or dealing with the year-end filing, even the savviest agents can make mistakes. Here are four common mistakes that you can avoid to stay at the top of your game.
Not Making Estimated Payments
Most real estate agents operate as independent contractors. This comes with benefits and responsibilities that ordinary employees do not have. One of those responsibilities is handling your taxes. While most people understand that there is an annual filing requirement, those new to working for themselves may not be aware that they must make estimated payments throughout the year. Employees do this automatically through the withholdings on their checks. But it is up to the independent contractor to do this at least quarterly.
If you expect to owe more than $1,000 (as an individual), you need to start making quarterly payments. How do you know how much you will owe? While the IRS has some tools to help determine this, the best way is to have a system in place that can track your profit and loss through the year and an advisor that can help you determine what is needed.
Not Separating Accounts
The right systems in place will help you determine the amount you might owe and help you separate your professional and personal expenses. Why is this important? Only those expenses that are related to your business as a real estate agent will be allowed to offset your income. The trip to Costco to stock up on water for showings may be deductible, but the same trip to buy snacks for your child’s sleepover is not. Having the right system to capture and document the reasonable expense for the correct use will allow you to understand how profitable your business is and help you when the IRS wants to take a closer look.
###Claiming all your deductions
As an independent contractor, you are running a business. As such, you get to claim deductions that employees would not be eligible for. It is easy to miss deductions, especially if, to begin with, you don’t have the right systems in place to capture them. But, now that you have a separate account for your business, you can start to see where your money is going. That will take you a long way in making sure you are maximizing your deductions and the first step in minimizing the amount of tax you will owe.
However, other deductions will not show up in your bank account but are worth looking into. Some of these are mileage driven for work, such as shuttling buyers around to viewings, home office expense, if you are working out of your home and not a central office, and depreciation for equipment, like a laptop or iPad.
Documentation, documentation, documentation!
The last mistake that we will explore today is the lack of documentation. If you get audited, it is up to you to prove that you had the expense you claimed. If you showed a trip to Costco, was it really business-related? If you showed mileage, can you prove you drove that much and was it really for your business? If not, then the IRS is unlikely to believe you and deny your expenses, increasing the amount you owed.
With all the technology today, this has become much easier. There are apps to capture receipts. Other apps to help you track mileage. Most of these can communicate directly with your accounting software. The critical part is to get it all set up and use it consistently.
If you have made any of these mistakes, contact us today to discuss what can be done to fix them.