Many individuals often wonder whether real estate agents are considered self-employed. The answer is yes, licensed real estate agents are classified as statutory non-employees. From a federal tax perspective, including income and employment taxes, they are regarded as self-employed. Understanding the distinction between an employee and an independent contractor is crucial for real estate brokers and expressing this difference to others is equally important.
The primary legal distinction between employees and independent contractors lies in the level of control the company exercises over the individual worker. If a corporation has substantial control over an individual, then that person is most likely considered an employee. On the other hand, individuals who have the freedom to carry out their work within their designated role and operate with minimal control from the company are more likely to be classified as independent contractors.
Real estate brokers in the United States work under the supervision of real estate agents, but they are typically not considered employees unless an explicit employer/employee relationship is established. Real estate agents are almost always regarded as independent contractors.
The Nature of Independent Contractor Relationships
Independent contractors are responsible for managing their own work schedules, business operations, accounting systems, and other commercial activities. It is important for both the contractor and the company to have a documented contract or agreement in place. Independent contractors have fewer obligations compared to employees within a real estate business. Although real estate agents are categorized as independent contractors, real estate brokers can still be held liable for the actions of their agents in certain situations.
In contrast to other industries, where independent contractor relationships are more straightforward, the relationship between real estate agents and brokers can be more complex. This is why the National Association of REALTORS® considers real estate agents to be “statutory non-employees” for tax purposes. Approximately 22 state real estate laws specifically authorize brokers to treat their agents as independent contractors while still fulfilling their legal supervisory responsibilities.
The Impact of the PATH Act
The Protecting Americans from Tax Hikes (PATH) Act, enacted in 2015, provides additional tax relief for business-related purchases made by real estate agents and brokers. By proposing adjustments to the IRS Section 179 deduction, the PATH Act allows individuals to deduct all or a portion of their purchase immediately, leading to significant tax savings. However, there are limitations on the types of vehicles that qualify for this tax break and the amount of deduction that can be taken.
It is crucial to be aware of the available tax deductions and take advantage of as many tax breaks as possible. Even minor expenses that are not essential to your firm can be deducted. Some common deductions for real estate agents and brokers include marketing expenses, real estate education and certification costs, fees for obtaining and renewing licenses, automobile expenses, and business-related travel expenses.
Common Mistakes in Uncertain Relationships
As a real estate broker, it is essential to establish clear relationships with your agents to avoid potential lawsuits. Unclear relationships can put brokers at risk of issues such as overtime pay disputes, non-compliance with labor laws, and failure to withhold taxes. A class action complaint filed against Coldwell Banker, known as Bararsani v. Coldwell Banker, alleged that the company misclassified its real estate agents as independent contractors while treating them as employees. The case was settled for approximately $4.5 million, highlighting the importance of understanding these distinctions.
Frequently Asked Questions
What type of employment is a real estate agent?
A real estate agent is an individual who works in the field of buying and selling properties. They show properties to potential buyers, handle paperwork, assess the real estate market, negotiate terms with owners, and provide real estate management and advice.
Are real estate agents in business for themselves?
Investing in real estate can be a lucrative venture, but individuals who want to work in this field must take certain key steps to be successful. Education and training are crucial, and understanding the industry is essential.
Can you be an independent real estate agent?
To become an independent real estate agent, you need to become a qualified agent by completing a course, determine your focus area, research the market, create a business and marketing strategy, learn the legal terminology used in real estate, and consider joining reputable real estate associations for credibility.
What are the advantages of being an independent real estate agent?
As an independent real estate agent, you have the flexibility to plan your schedule, choose the properties you want to promote, and take breaks when needed. While acquiring clients may require extra effort, you can work on your terms, exceed your clients’ expectations, and specialize in various types of properties or attributes.
Do independent real estate agents earn more?
One of the most appealing aspects of being a self-employed real estate agent is the potential for higher earnings. Unlike working for a real estate agency, where the commission structure determines your wages, being independent allows you to choose your pay and work as long as necessary to reach your financial goals.
Real estate agents play a vital role in assisting individuals with buying or selling properties. Their responsibilities include managing and inspecting properties, advertising, negotiating agreements, and providing advice based on clients’ needs. Becoming an independent real estate agent requires careful planning, effort, and ongoing client interactions. However, the rewards can be substantial once you establish a solid client base. For more information on real estate, visit Garrity Traina.