What Percentage of a Real Estate Commission Goes to Taxes?

Set aside 25 to 30 percent of every commission check for tax. You are self-employed, nothing is withheld, and you owe both income tax and self-employment tax on what you earn. Some agents in higher brackets or higher-tax states should set aside more.

Why the number is higher than people expect

Because two separate taxes apply, and most people coming from employment have only ever seen one of them clearly.

Income tax works as it always did, at whatever bracket your total income puts you in. Self-employment tax is the part that surprises people: it covers Social Security and Medicare, and as a self-employed person you pay both the employee and the employer halves, which comes to roughly 15.3 percent of net self-employment earnings.

When you were employed, an employer paid half of that on your behalf and you never saw it. Now you pay all of it.

What that looks like on one transaction

That check looked like $6,950 when it arrived. Roughly $1,900 of it was never yours.

Open a separate account before your first closing

This is the single most useful habit in this article, and it takes twenty minutes.

Open a second account, and the day any commission lands, move the tax portion into it immediately, before you look at the remaining balance. Then treat that account as though it does not exist, because it does not. It is already spent.

Agents who plan to catch up later almost never do, because the money is spent on ordinary things and the bill arrives in a lump.

Do you have to pay quarterly?

Usually yes, and this catches people in their second year.

Self-employed people are generally expected to make estimated tax payments four times a year rather than once at filing. Miss them and you can face underpayment penalties even if you pay the full amount later.

The first year is sometimes more forgiving depending on your circumstances, which is exactly why year two is when it bites. Ask an accountant how it applies to you, in your first few months, rather than working it out from a forum.

Does the 25 to 30 percent cover everything?

It covers federal income tax and self-employment tax for most agents at typical first-year income levels.

It may not be enough if you live in a state with its own income tax, if you have significant other household income pushing you into a higher bracket, or if you have an unusually strong year. In those cases 30 to 35 percent is safer, and the cost of over-saving is that you get some of it back.

Do business expenses reduce it?

Yes, and this is the part that works in your favor.

Self-employment tax applies to your net earnings, meaning income after legitimate business expenses. Mileage, MLS and association dues, marketing, photography, your phone, professional education and much else may be deductible, which reduces the amount being taxed.

Which is why keeping records matters from day one rather than from the month you start worrying about it. Mileage in particular is frequently the largest deduction available to a new agent and the one most often lost through not tracking it.

What should you track from day one?

• Mileage. Every business trip, with date and purpose. Use an app, because reconstructing a year from memory does not work.
• Every business expense, with a receipt. Dues, MLS, signs, photography, software, education.
• Commission income, as it arrives, with the closing it relates to.
• Home office details, if you have a space used regularly and exclusively for work.
• Your brokerage statements, which show splits and fees and are the basis for much of this.

What about the months with no income?

They do not reduce what you owe on the months that had some, which is the trap in a lumpy business.

An agent who closes two transactions in March and nothing in April and May still owes tax on March. If the March check was spent across three months of living costs, the money for that tax bill has already gone. This is the specific mechanism by which agents end up owing amounts they cannot pay.

The set-aside habit solves it entirely, because the tax portion never entered the spendable balance in the first place. It is the single reason to move the money on the day the check lands rather than at the end of the month.

Should you get an accountant?

For most agents, yes, and earlier than feels necessary.

A conversation in your first few months, before any money has moved, is worth considerably more than one in April. It settles your set-aside percentage, whether you need to make quarterly payments, what you can deduct, and whether any change to your business structure makes sense.

This article is a general guide and not tax advice. Your numbers depend on your state, your bracket and your circumstances, and an hour with someone who knows all three is one of the better investments available in a first year.

The full breakdown of what you keep from a commission after split, fees and tax, plus a year-one cost table and a runway worksheet so you can plan from real numbers rather than from the figure on the check.

[Download The Real Numbers Guide (free)](/free/)