Real Estate Agents as Independent Contractors
The real estate industry went to the lawmakers and requested some special treatment when it came to independent contractor status. The laws at the time — and they still do — had a list of questions that were pretty rigid and made it very difficult to operate a real estate brokerage without agents being employees. We got a sweet deal.
Know the Rules
Real estate agents and brokers enjoy a special IRS classification as Statutory Independent Contractors. Be sure that you know the rules to keep that status. In the changing world of real estate services, new business models and compensation methods may result in classification as an employee.
As more agents are recruited into discount brokerages with business models that pay salaries for base income, there could be problems with meeting the tests for independent contractor status. It is important that both broker and agent know precisely what their relationship is, and that they have some sort of document or contract stating that relationship.
It is unfortunate that many enter real estate thinking that it's all about "sales." You're selling houses. Really, real estate is a service business, and there is a lot of legal and tax related stuff involved. Not treating this stuff seriously can get you into trouble.
The Sales Associate Must Be a Licensed Real Estate Salesperson
This seems self-explanatory, but the law wanted to be sure that real estate brokers did not place assistants or agents-in-training in the status of independent contractor. This is important, as the real estate professional who is licensed and enjoys the independent contractor status should always remember that this means that they are a business, and they own the business.
There is nothing wrong with hanging your license with a broker, and in many cases, it is required. But, when you're taking advantage of the services and offices of the broker, still remember that you are your business. If they offer you website space, take it, but you should establish your own online presence with a website and/or on the social media as soon as possible. You never know when you'll want to go out on your own or move to another brokerage.
Income Must Be Related to Sales and Not Hours Worked
If a broker has a licensed assistant but pays them by the hour or bases their compensation on hours worked in some way, they cannot be an independent contractor. If you are a part time agent and are doing other jobs for the brokerage on an hourly or salaried basis, it's likely that independent contractor status would not apply, as the majority of your compensation would not be from sales related activities.
Keep accurate accounting records and document all commissions versus other income from the brokerage. Actually, the cleanest deal would be to only get commissions and possibly some expense reimbursement now and then, but not often.
There Must Be a Written Independent Contractor Agreement
A written independent contractor agreement between the real estate agent and the broker would state the fact that the agent is to be treated as an independent contractor for federal tax purposes.
Note that there are other state laws that could base status on common-law for purposes of unemployment compensation and workers' compensation. In those states, the broker must meet the more restrictive requirements, whichever they are.
Common-Law or Statutory Independent Contractor Status
The three requirements above are to qualify as a Statutory Independent Contractor under the law passed by Congress in 1992. It applies to federal tax purposes only.
Prior to that, the common-law tests of control of work were used, as well as the 20 or so tests applied by the IRS. These tests also took into account how the agent was paid for their efforts. The uneven application of the rules by the IRS resulted in Congress passing a law to create the status of the statutory independent contractor. The tests above determine that status.
If your state uses more restrictive common-law tests, the broker must meet those more restrictive requirements.