Do Realtors Pay Taxes on Commission?

Real estate professionals navigate a unique financial landscape. Realtors pay taxes on their commission income, which differs significantly from traditional W-2 employees because most realtors operate as independent contractors. This distinction shapes how their income is reported and the types of taxes they are responsible for.

Understanding Commission as Income

Real estate agents typically function as independent contractors, not employees, of their brokerage firms. Their compensation is predominantly commission-based, tied to sales or other output. Brokerages do not withhold taxes from their commission checks, placing the full responsibility of tax payments directly on the agent.

Instead of a W-2 form, real estate agents usually receive a Form 1099-NEC (Nonemployee Compensation) from their brokerage each year. This form summarizes the total commissions paid to them. The 1099-NEC reports income of $600 or more paid to non-employees for services rendered.

For federal tax purposes, realtors are treated as self-employed for all income and employment taxes. This classification applies if payments for their services are related to sales or other output, and they have a written contract stating they will not be treated as employees. Agents are solely responsible for managing their tax obligations, unlike W-2 employees who have taxes automatically deducted.

Types of Taxes on Commission

Real estate agents, as self-employed individuals, are responsible for several types of taxes on their commission income. These include federal income tax, self-employment tax, and potentially state income tax.

Commission income is subject to federal income tax. The specific federal income tax rate applied to a realtor’s net earnings depends on their total taxable income and filing status.

A significant tax obligation for self-employed realtors is the self-employment tax. This tax covers Social Security and Medicare contributions. Self-employed individuals are responsible for both the employer and employee portions of these taxes. The self-employment tax rate is 15.3% on net earnings from self-employment, consisting of 12.4% for Social Security and 2.9% for Medicare. For 2025, the Social Security portion applies to the first $176,100 of net earnings, while the Medicare portion applies to all net earnings without a cap. The self-employment tax is calculated on 92.35% of net earnings from self-employment.

Real estate agents may also be subject to state income taxes. State income tax laws vary, with some states having no income tax. Realtors should consult their state’s tax regulations to determine their specific obligations.

Allowable Business Deductions

Real estate agents can reduce their taxable income by claiming legitimate business expenses. These deductions are permitted for “ordinary and necessary” expenses paid or incurred during the taxable year in carrying on a trade or business. An “ordinary” expense is common in the real estate industry, while a “necessary” expense is helpful and appropriate for the business.

Many expenses incurred by realtors qualify as deductions. These include:
Brokerage fees and commissions paid to other agents.
Marketing and advertising expenses, such as signs, online advertisements, professional photography, and website development.
Professional development costs, including continuing education, licensing fees, and real estate association dues.
Vehicle expenses, such as gas, maintenance, repairs, and parking fees, often by using the standard mileage rate or tracking actual expenses.
Home office deduction, if a dedicated space in the home is used exclusively and regularly as the principal place of business.
Office supplies, technology, software subscriptions, business insurance, and legal or professional fees for services like tax preparation or legal consultation.

Managing Tax Obligations

Managing tax obligations throughout the year is crucial for real estate agents. Since no employer withholds taxes from their commission income, realtors must proactively pay estimated taxes.

Estimated taxes are typically paid quarterly to cover federal income tax and self-employment tax. These payments are generally due on April 15, June 15, September 15, and January 15 of the following year. Failure to pay enough tax by the due date may result in penalties.

Meticulous record-keeping for both income and expenses is paramount to substantiate all claimed deductions. Realtors should maintain organized records such as receipts, bank statements, and mileage logs. This documentation helps accurately calculate income for estimated tax payments. Records should generally be kept for at least three years after filing a return.

Setting aside a portion of each commission for taxes is a recommended practice. Many professionals suggest earmarking 25-30% of income for this purpose. Consulting with a tax professional can provide personalized advice, assist with tax planning, and ensure accurate preparation of tax returns.