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Most real estate agents are independent contractors, not employees. That means your brokerage doesn't withhold taxes from your commission checks, and you're responsible for both income tax and self-employment tax. The upside is that agents have substantial deductible business expenses that can significantly reduce taxable income.
Income You Owe Tax On
Your gross commissions are self-employment income, reported on Schedule C. Your brokerage may issue a 1099-NEC for your commissions or provide a summary. Either way, you report what you actually received. Referral fees you pay to other agents reduce your income; referral fees you receive are additional income.
Commonly Deductible Expenses
Real estate agents have significant deductible expenses: Multiple Listing Service (MLS) fees, brokerage desk fees and franchise fees, real estate license fees and continuing education, E&O (errors and omissions) insurance, business cards, signs, and marketing materials, advertising for listings and personal promotion, website hosting and CRM software, vehicle mileage for client showings and property visits, and professional photography for listings.
Vehicle Expenses
Driving is a big part of real estate, and mileage is a significant deduction. You can deduct the standard mileage rate (currently 67 cents per mile for 2024) or your actual vehicle expenses for business miles. You must keep a mileage log with dates, destinations, and business purposes. Commuting miles (from home to your office) are not deductible.
Meals and Entertainment
Business meals are 50% deductible if there's a genuine business purpose and you document the business discussion. Entertainment expenses (sports tickets, concerts) are no longer deductible. Closing gifts to clients are deductible as business gifts up to $25 per recipient per year.
Quarterly Estimated Taxes
Commission income can be lumpy — big months followed by slow ones. Still, you need to pay estimated taxes quarterly to avoid penalties. A common approach is to set aside 25-30% of each commission check in a separate savings account earmarked for taxes.