Real estate agents earn lumpy income, pay their own taxes, and often spend thousands before a commission arrives. Those three facts shape everything about their tax situation. A closing in March might be the first income since September, and by then a large part of it already belongs to the IRS.
How agents are classified
Under a long-standing federal rule, a licensed real estate agent is treated as a nonemployee for federal tax purposes if substantially all compensation is based on sales or output rather than hours worked, and there is a written contract stating that the agent will not be treated as an employee for federal tax purposes. This 'statutory nonemployee' status means the brokerage does not withhold income or payroll taxes from your commissions. Instead you receive a Form 1099-NEC, report the income on Schedule C, and pay self-employment tax yourself. Confirm that your contract and compensation structure meet the requirements.
What goes on your Schedule C
- Gross commissions before the brokerage split. If the brokerage pays you net of its share, make sure the 1099 and your records show how it was calculated.
- Brokerage desk fees, franchise fees, and transaction fees.
- Marketing: signs, photography, advertising, websites, CRM and lead generation costs.
- Licensing, association dues, MLS fees, and continuing education.
- Errors and omissions insurance and other business insurance.
- Vehicle expenses, tracked by mileage log or actual costs. The IRS publishes the standard mileage rate annually.
- Phone, internet, software, and office supplies.
- Home office, if you meet the regular and exclusive use requirement.
- Client gifts and meals, which have specific limits. Confirm the current rules with your preparer.
Self-employment tax and estimates
Your net profit is subject to self-employment tax in addition to income tax. Because nobody withholds, you generally have to make quarterly estimated payments. The risk with lumpy commissions is underpaying early in the year and facing a large balance, or a penalty, later. Pay a percentage of each commission check into a separate tax account the day it arrives. See quarterly estimated taxes for LLC owners and how much to set aside for business taxes. If your income swings across the year, the annualized method may reduce penalties.
Deductions many agents overlook
- The deduction for half of self-employment tax.
- Self-employed health insurance, claimed on the personal return when you qualify.
- Retirement plan contributions such as a SEP IRA or solo 401(k), which both reduce tax and build savings.
- The qualified business income deduction, which may apply to eligible pass-through income and has income-based rules.
- Startup costs in your first year.
- Transaction coordinator, assistant, and staging costs.
Record-keeping that makes the return easy
- 1Open a separate business bank account and card.
- 2Record each closing: date, property, gross commission, split, fees, and net deposit.
- 3Keep a mileage log from day one, with date, destination, purpose, and miles.
- 4Save receipts for marketing and client costs.
- 5Reconcile monthly. See monthly bookkeeping checklist for LLC and S-corp owners.
Should you form an LLC or S corporation?
An LLC can provide organization and sometimes liability benefits, but by default it does not change your federal tax. An S corporation election can reduce self-employment tax at higher income levels, but requires payroll, a separate return, and a reasonable salary, and brokerages vary in how they pay entities. Many agents wait until income is steady. Read LLC taxed as S corp and first-year LLC taxes before deciding.
State considerations
State income tax, licensing, and local business tax apply on top of the federal rules. If you hold licenses or close transactions in more than one state, you may have to file in each. States differ in how they treat agents working under a broker, so check where you earn income.
Common agent tax mistakes
- Spending the whole commission and having nothing for taxes.
- Missing estimated payments because income was uneven.
- Deducting personal spending as marketing.
- No mileage log, which weakens the vehicle deduction.
- Forgetting that 1099 income is taxable even when no form arrives.
Our tax preparation service prepares returns for agents and sets up estimated payment plans. To schedule a consultation, tell us your last year's gross commissions, your brokerage split, and whether you work in more than one state.
