Most commercial real estate brokers are independent contractors with 1099 compensation. By default, you are a business operating as a sole proprietor. Thinking and acting like a genuinely separate business is crucial to your future success in this profession.
As an independent contractor in real estate sales and brokerage, you have the opportunity to form an entity and elect S Corporation tax status. The primary benefit of doing this is tax savings. However, an ancillary benefit is forcing you to separate business income and expense activities from personal.
When you form an entity, you will open a bank account in the entity’s name. Commissions paid by your brokerage firm will now be deposited into the business bank account. You may also open a business credit card for expenses.
Acting as a separate business will improve your organization which is essential for creating financial statements that will be used to prepare a tax return. Therefore, creating a system to clearly separate business from personal activities is important.
Hiring a professional bookkeeper can help offload many tasks and due dates to manage. Additionally, the bookkeeper will assist in organizing and categorizing income and expenses. Your time is too valuable to learn administrative duties and level 100 accounting. Create leverage for yourself and hire a bookkeeper.
An additional benefit to keeping business and personal accounting separate is less stress when tax season is here. The bookkeeper will organize everything that happened last year into professionally preparing financial statements. Having all of this done for you will reduce anxiety and better focus your attention on your business, your clients, and making more money.
Finally, suppose the IRS ever audits your business. In that case, the experience will be drastically different if you can show them separation of business and personal, a well-thought-out and organized system for keeping track of business income and expenses, and a professional bookkeeper producing financial statements. For example, suppose the IRS reviews your bank statements, and they see commission income, your mortgage payment and expenses from last month’s family vacation. In that case, they will likely be more aggressive in scrutinizing what you have reported.
There are countless opportunities for inefficient use of your time and bookkeeping is one of those tasks that do not need to be on your plate. Instead, take advantage of other professionals to support you and provide leverage.
