What Is a Real Estate Independent Contractor?

Definition and Examples of a Real Estate Independent Contractor

real estate agent on the phone at a desk in front of a laptop
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A real estate independent contractor works as an agent and maintains sole control over their business functions, such as work schedules and accounting. The "contractor" part of the term indicates that some type of written agreement or contract has been executed with the company or person who is hiring them to perform a task, job, or function, typically their broker.

Some definitions of the term state that the person or entity who's hiring the contractor isn't liable for the contractor's actions, but most state real estate laws make the broker who's in charge of an agent responsible for their actions.

What Is a Real Estate Independent Contractor?

Status as an independent contractor rather than an employee is primarily based on three concepts:

  • An independent contractor has control over when, where, and how they perform their service.
  • An independent contractor, not the client or company to whom they're providing a service, determines when and how they will be paid. This might involve invoicing the client for services rendered.
  • An independent contractor is not provided with the usual employee benefits, such as insurance or paid vacation.

Special treatment of real estate agents was adopted by the IRS to provide for the liability assumed by brokers when the agents otherwise met these rules. The IRS has declared that real estate agents, along with direct sellers and some companion sitters, are "statutory nonemployees" for tax purposes. As such, they're considered self-employed for tax purposes, just as an independent contractor would be.

How a Real Estate Independent Contractor Works

While it's true that most agents must work under the supervision of a broker, this doesn't change the fact that as independent contractors, they're in business for themselves. You might receive some advertising, a desk, and a phone from your broker when you're an agent, but they're not the owner of your business. 

Think like the owner of a business if you want to grow, prosper, and take advantage of IRS tax provisions.

Tax Filing Requirements for Independent Contractors

Statutory nonemployees are subject to the same tax filing requirements as independent contractors. This involves:

  • Paying quarterly estimated income taxes because no employer is withholding these taxes from their pay
  • Paying the self-employment tax as calculated on Schedule SE with their tax returns, the equivalent of the Social Security and Medicare taxes normally shared equally between employee and employer and withheld from paychecks
  • Completing Schedule C with their tax returns, which reports their full gross income from real estate less certain allowable business expenses, which is their net taxable income

It can be beneficial to seek the help of a tax professional in your first year of operation as an agent so you're sure you understand these provisions.

How to Become an Independent Contractor

Becoming an independent contractor begins and ends with taking responsibility for your own business.

You've studied, paid for classes, taken your exam, paid for your license, and now you're out there trying to get those commissions running. The broker you're affiliated with is no doubt providing you with a desk they own, a phone they own, and maybe some advertising space they've already contracted for at a bulk rate. It's nice to get a spot on the brokerage website and some free space in their contracted print ads. 

One of the reasons brokers aren't hesitant to take on new and inexperienced agents is because there really isn't a large investment in doing so. 

The broker sets you up and sends you out, maybe giving you some floor duty as well so you can get a lead or two. If you succeed, it will be because you worked for it and learned. The desk is ready for another agent if you don't succeed.

Let's say that you're satisfied with this, then you look into the future. You decide you want to change brokers, or you want to go out on your own. All the goodwill and business marketing stays with your existing broker. Sure, you can contact past clients and tell them you've moved, but you'll have to start at zero with your new broker's marketing.

Think of your marketing as your business presence, not your broker's. Just keep doing it, and you'll take your business online presence with you in the future when and if you decide to move.

At a minimum, you'll need your own website, and preferably a blog as well. You should also establish your own presence on social media sites: Facebook, Google+, LinkedIn, Twitter, Pinterest, and Instagram. 

Key Takeaways

  • The IRS has declared that real estate agents are statutory nonemployees, which makes them independent contractors for tax purposes.
  • This was previously a matter of some dispute because most state laws hold that real estate brokers are liable for the actions of their agents and independent contractors are typically liable for their own actions.
  • Agents must file their tax returns as independent contractors, and this includes paying the self-employment tax equivalent of Social Security and Medicare taxes.

Article Sources

  1. IRS. "Independent Contractor (Self-Employed) or Employee?" Accessed Sept. 2, 2020.

  2. IRS. "Statutory Nonemployees." Accessed Sept. 2, 2020.

  3. IRS. "Self-Employed Individuals Tax Center." Accessed Sept. 2, 2020.