Business vs. Personal Checking
As a self-employed individual, you should open a business checking account. Every dollar of commission earned should go through this account first. This is the account you will use to pay all your real estate related expenses. You will need to make tax payments to the IRS from this account as well.
You will not know what tax bracket you are going to be in when you first start in real estate, but you do know that you will be paying self-employment tax. Self-employment tax is the employer and employee shares that are due to the Social Security system and Medicare. Normally the employer is required to pay part of this tax and the employee pays the rest. Because you are self-employed, you must pay both shares. This cost may change annually, but is currently at 15.3 percent. Check with
If you assume that you will be in one of the lower tax brackets the first year you are in the business, you can take approximately one-third of each commission check and set it aside for the IRS. Deposit this money in a separate savings account to keep from spending it, and use it to make the quarterly payments. Your tax advisor can show you how to set up a quarterly payment plan with the IRS.
Alert
Alert If you don't make quarterly payments, you may be responsible for hefty penalties and interest when your annual taxes come due. If you receive a hefty commission check, you may actually need to deposit more often than quarterly, so be sure your tax advisor knows if you receive an unusually high commission.
Once you have paid toward your taxes and paid all your business expenses, you can write yourself a check to deposit in your personal account. Keep some money in your business account for ongoing expenses, in case you do not have any commissions forthcoming.
After the first quarterly payment, you and your CPA can determine if you are on track or behind for the year. If you are ahead, don't be tempted to spend the money. Chances are your business will continue to improve, and it is better to have money set aside than to try and find it later.
Your automobile
It's essential to keep track of the number of miles you put on your car to conduct business. Some agents take a per-mile tax deduction and others opt to use actual auto expenses as their deduction, but both groups of agents record their business miles to determine which method is best and to help them calculate the percentages of business and personal use.
Fact
Most people are so computer oriented now that many agents use electronic log and appointment books to record their mileage and daily tasks. Use the method that suits you best, but talk to a tax professional to find out what type of permanent records the IRS requires if an audit takes place.
Record your odometer reading at the beginning of the tax year — for most of us that is January 1. Keep a mileage log in your car and enter a date and location for each beginning odometer reading, both business and personal. Record the date and time when that particular use ends. For business use, and an even more complete record, jot down the name of the client you were with. Use a bright high-lighter to mark your business trips so they are more visible. Total your business and personal miles each week or month.
Written Receipts
The IRS will not always accept a canceled check or a credit card statement as verification of an expense. You must keep the actual receipts for your expenses in order to prove exactly what you purchased. Keeping all of your receipts for the required three years (sometimes longer) can generate a mountain of paperwork that is impossible to dig through if you don't keep it organized.
When you buy something with a credit card, staple individual receipts to the statement when it arrives so that all documents related to the sale are in the same place. Most banks don't return canceled checks anymore, but they do normally provide you with copies of the checks. Attach all receipts that are associated with your checks and deposits to the appropriate statement. Cluster all cash receipts together and arrange them by date in another file.
Keep an ongoing log of your expenses by date. A program, such as Quicken or Microsoft Money, works like a checkbook but lets you enter and categorize all outgoing and incoming funds, whether they are by paid by check, credit card, or cash. You can use the search features in the program to quickly find a transaction by name, date, or category. Once you know how and when you purchased the item, it's easy to retrieve the receipts from your files.
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Some tax professionals recommend that you keep all of your receipts, both business and personal, so that you can show the division between the two types of expenses. Ask your own tax person for advice on which records you should keep.
When the tax year ends, gather all of the current year's records into a storage box, mark the year on the outside, and put the box in a safe location until it can be legally disposed of.
