Cash flow for CRE brokers can be very inconsistent. Not having tax surprises is a priority and so is making contributions to retirement accounts. Knowing how much to hold back from every transaction closing can be very helpful in managing cash flow and accomplishing savings goals.
Income taxes and payroll taxes are both affected by other variables. Payroll taxes by how much you pay yourself in W-2 wages. Income taxes by your wages and net income from the business. Two CRE brokers with the same gross revenue can have dramatically different net income due to retirement account contributions.
To map out what to expect in taxes and contribution opportunities, we start with a list of retirement accounts and other investment accounts available to the CRE broker. We show the maximum contribution amount for retirement accounts.
Since retirement accounts are not the only accounts you should be saving and investing in, we also include what you’re currently saving to these or a goal. These accounts do not have contribution limits.
Not everyone can fully contribute to every account, so we also provide a version with minimum contribution assumptions and something in between.
Next, we take each version of the account contributions and incorporate that into a tax projection to estimated total taxes.
Finally, we translate the dollars expected to be spent on taxes and account contributions into a percentage, so you have a better idea of how much to hold back from every deal that closes.
Let’s take a look at an example.
Jim is a 35-year-old CRE broker making $250,000. He is paid 1099 and already set up as an s-corp. We’ve established his wages to be $100,000. His account contribution options could look like this:
1. $19,500 – 401(k) employee
2. $25,000 – 401(k) employer profit sharing
3. $6,000 – non-deductible IRA
4. $3,600 – Health Savings Account
5. $12,000 – brokerage account
In this scenario, he is fully contributing to the accounts available to him and adding $1,000 per month to a brokerage account. The contributions total $66,100 which represents 26.44% of his gross income.
His taxes will include $15,300 of payroll tax and approximately $32,000 of income taxes as a single filer. Taxes total $47,300 which represents 18.92% of gross income.
In this example, we will recommend Jim hold back approximately 45% of income from every deal in order to pay his taxes and save for the future.
Another version of his account contributions options and savings goals will have lower amounts.
1. $19,500 – 401(k) employee
2. $6,000 – non-deductible IRA
Assuming only those two accounts to contribute this would represent 10.2% of gross income.
Income taxes will be slightly different because tax-deductible contributions are lower. Payroll taxes will be the same $15,300 but income taxes will instead be $39,000. In total, this represents 21.72% of gross income. We will recommend Jim hold back approximately 32% of income as it arrives.
We update these assumptions multiple times a year. As taxes are paid and account contributions are made we will adjust the recommended percentage.
Need help organizing and better managing your cash flow? Reach out to us and we’ll translate your situation and goals into an actionable plan.