We all know the saying about the two things you can count on in life, and one is taxes. For many of the 72 million Americans who prepare their own taxes, the filing process is fairly straightforward. However, taxes can be more complicated for insurance agents, particularly when it comes to tax deductions. For insurance agents, like other savvy businesspeople, getting the advice of a tax professional helps ensure you pay your fair share—without losing additional cash unnecessarily.
“Insurance agents and their agencies are just like any other small business—unless you are a trained tax professional, you could be missing out on key tax deductions and other tax breaks,” says Michael Cohen, president of Bering Insurance Partners.
That’s why Cohen recommends working with a tax professional who knows what they’re doing. For example, it could be something as simple as making sure expenses go into the correct category, or how and when to record certain types of revenue.
In addition, tax accountant Eric J. Nisall says some people may be taking tax deductions for insurance agents that aren’t applicable due to their employment category. “If you’re an employee of an insurance agency, you don’t get any tax deductions for work-related expenses, as IRS Form 2106 Employee Business Expenses is no longer allowed for this particular job type.”
Of course, a self-employed insurance agent won’t have this issue since their expenses will be considered business expenses, assuming they maintain proper records. Nisall says all business expenses will reduce your net income, reducing your basis for self-employment tax as well as your taxable income for federal and state income taxes. “A tax professional can help you maximize this net income reduction.”
Mike Jesowshek, CPA and speaker on the Small Business Tax Savings Podcast, adds that a tax professional can help you understand and take advantage of pre-tax dollars (money that has not yet been taxed) vs. after-tax dollars.
“You lose out every time you spend after-tax dollars that could have been pre-tax dollars,” Jesowshek explains. “As a self-employed insurance agent, you have a great opportunity to take advantage of deductions available to you by understanding this distinction.”
For example, say you’re looking to set up a home office for your agency. You can buy your office furniture and supplies through your business and claim that expense so that it is deducted prior to being taxed.
“The goal should always be to strategize ways to move your after-tax dollar spending to pre-tax dollar spending by having a specific business purpose,” says Jesowshek.
There are a number of tax deductions available for insurance agents. Exactly what can an independent contractor write off in their agency? See what experts in insurance and tax preparation recommend below.
“I would say the number-one rule to follow is to make sure you’re deducting business expenses, not personal ones,” says Cohen. This may seem obvious, but if you don't keep clear records of your expenses, things can easily get mixed up. “Be sure to maintain separate accounts for your business and personal dealings.”
Below are several deductions insurance agents can take on their income taxes.
“Your licensing requirements and continuing education (including the work/education components of professional conferences) are deductible since you cannot do your job without them,” says Nisall.
Alex Williams, a certified financial planner and CFO of FindThisBest, underscores the importance of licenses as tax deductions for insurance agents. “The application, exam and processing fee for insurance licenses can get quite expensive. The cost of getting just one license can easily reach $150, so it’s key that you claim any licensing fees you incur.”
Agents also have to get their licenses renewed; those renewal fees can be deducted in a similar fashion. “This is an important deduction, especially for agents who aren’t making a lot of income but still have to pay taxes.”
Nisall says that whatever software you’re using specific to your insurance agent duties is appropriate to deduct. “Claim the digital tools that help you write policies, manage your client list, store work files, communicate with clients and peers, and so on.”
The home office is one of the IRS’ most closely monitored tax deductions. Agents should ensure that they have dedicated this space for work purposes only and regularly work from here. To determine your deduction, multiply the square footage of your office by $5; the IRS allows deductions of workspaces up to 300 square feet. In total, this is a potential deduction of as much as $1,500.
Insurance agents claiming a tax deduction for insurance—a novel concept. Jaime Arias, insurance agent and VP of marketing at Dynamic Insurance Solutions, reminds agents that their very own product is tax deductible. “Insurance agencies generally need at the very least an errors and omissions policy—the cost of such business insurance is tax deductible.”
Nondeductible Expenses For Insurance Agents
It’s also important to know about expenses you can’t deduct come tax time. Here are a few:
- Personal hygiene expenses like haircuts, clothing, and dry cleaning (unless for a uniform)
- Legal violation fees such as parking tickets and court fees
- Life insurance premiums when you are the beneficiary
- Political contributions
Cohen notes the last expense may not be readily apparent because if you belong to any kind of professional association or business organization, a portion of your dues may be going toward political activities.
“The organization will usually make you aware of this on your annual statement,” Cohen explains. “So pay close attention and make sure you’re not counting that portion toward your deductible expenses.”
“It's important to keep track of your income and expenses. It will not only make tax filing easier, but it will also save money if you use a tax professional because they won't have to charge you for time spent combing through your records,” says Nisall.
Arias adds that it’s important to remember that the IRS can also review records for the three years prior to the filing year in the event of an audit. And if they find significant errors, they can go back up to six years. “If a self-employed insurance agent doesn’t have proper documentation for their expenses, they may find themselves in a precarious position with the tax agency.”
Below are a few tools experts recommend to help you keep track of tax-related items.
Williams says Expensify is one of the best tools for monitoring expenses and tax deductions. You can track everyday expenses, scan and input receipts, and create reports. It’s a robust app with powerful tracking features, and includes extra functionality—like reimbursements for employees—as well.
Nisall says a program designed for bookkeeping purposes, such as QuickBooks Online, can help keep your business expenses clearly categorized and separate from your personal expenses.
Sometimes you don’t need a solution with a lot of bells and whistles. In that case, tools you likely already have access to, such as Excel, may come in handy. “Depending on your needs, even a simple spreadsheet program can get the job done, especially if you’re just keeping track of income and expenses,” says Nisall.
“One great tool to help insurance agents monitor their deductions is TaxAct Express,” says Greg Rozdeba, president of Dundas Life. “The app has reasonable prices and offers useful features. Agents can quickly check the list of deductions available to them according to their specific job role and even cross off the ones they’ve already taken. They can also easily import tax data from the previous year.”
Tax deductions for insurance agents are much like those for other professions—it pays to be in the know about money-saving tax approaches. The above recommendations are helpful, but remember to consult a tax professional versed in this area to optimize your taxes. And if you’re looking for more tips for insurance agents and producers, check out our posts on the EverQuote blog.