Real estate agents who prefer working as independent contractors rather than employees of a brokerage can choose this route, reaping many advantages in doing so, such as setting their own schedule and deducting business expenses from taxes.
Brokerages must take great care to classify real estate agents accurately and provide them with adequate protections.
Autonomy
Real estate agents typically work as independent contractors, which allows them to set their own schedule and work as they see fit. This form of autonomy attracts many to the industry while helping maintain balance between personal and professional lives. But independence also comes with challenges; in this post we’ll examine some of the most commonly experienced challenges by real estate agents working as independent contractors – as well as ways they can be overcome.
Psychological autonomy refers to one’s ability to manage their emotional states, including anxiety and anger, including managing anxiety and anger effectively in order to maintain healthy relationships and mental wellbeing. Psychological autonomy should not be confused with ethical or legal autonomy which are distinct entities altogether. Psychological autonomy plays a pivotal role in maintaining strong relationships as well as mental wellness.
Ethical autonomy refers to a person’s right and moral authority to choose their values, commitments, and relationships according to their moral code. Its basis rests upon the notion that every human being possesses inherent worth and dignity – an aspect essential for a healthy society that should be respected by everyone.
Legal autonomy refers to one’s ability to negotiate one’s pursuit of goals and commitments with others. It plays an essential role in democratic societies as it allows individuals to exercise collective self-rule.
Real estate broker firms should always pay careful attention when classifying agents as independent contractors, to avoid misclassification lawsuits against their company. Therefore, it’s vital for broker firms to regularly review this aspect of agent classification.
An example would be when a broker firm sets rules limiting an agent’s time at home or on the road; and mandating they attend mandatory meetings and training sessions. If these guidelines are violated, the agency could be considered as an employer responsible for workers’ compensation, withholding taxes, and other issues related to its employees.
Real estate agents are an intriguing topic; whether or not they should be considered independent contractors often depends on state laws as well as the relationship between agent and brokerage. While most broker firms classify them as such, due to an ever-evolving legal landscape it would be prudent for them to revisit these relationships from time to time.
Taxes
Real estate agents typically receive compensation on a commission basis, earning income based on the property sold and depending on their contract with brokers or companies they may be subject to different tax rules and rates. Independent contractors are responsible for paying their own taxes throughout the year and must keep track of incomes and expenses throughout their contract period; failing to do so could incur serious IRS penalties.
The primary difference between traditional employer-employee relationships and those where agents are considered contractors lies in how taxes are paid; an employee typically has social security and Medicare withheld from their paychecks while an independent contractor must report these payments themselves through quarterly estimated tax payments.
Independent contractors must understand how much tax money they owe and the applicable rates before April 15th rolls around. To help avoid this scenario, real estate agents are advised to open a savings account dedicated solely for taxes; any time they receive commission checks they should immediately deposit a portion into this special savings account so as not to spend money elsewhere. This way they won’t be tempted by spending temptation and more often spend it all elsewhere!
Real estate agents face one of the highest tax rates of all professionals: self-employment tax at 15.3% of taxable income. Furthermore, state income taxes must also be paid. Independent contractors typically file Form 1040-SE with the IRS which details both income and expenses incurred while working for someone. It would be beneficial for these individuals to work closely with an accountant so as to stay abreast of any expenses and claim all applicable deductions.
As the landscape shifts towards more traditional employee-employer relationships, broker firms must carefully examine their relationships with real estate agents – failure to do so could result in miscommunication or lawsuits later on.
Licensing
Real estate professionals must obtain a license in their state in order to practice, with differing regulations across each state governing licensing procedures. Some require agents work through specific brokers or companies while others don’t mandate it at all. Furthermore, many brokerages require agents possess Errors and Omissions insurance in case an agent misrepresents information or treats either party unfairly.
Real estate agents must create their own website, blog and social media accounts in addition to being licensed. This enables them to market their services independently while building an independent presence which they can take with them when switching brokerages. Unfortunately, creating this type of presence online may prove challenging for new agents still learning the ropes.
As most real estate agents are independent contractors, they must still be overseen by a broker for guidance and supervision. This can make the distinction between employee and contractor confusing when considering federal tax implications; should an agent mistakenly be classified as an employee they could miss out on benefits such as health insurance coverage and deductions from taxes.
There are various factors that determine whether or not a real estate professional should be considered an employee or independent contractor, the primary one being how much control the hiring company has over his/her hours, location and type of work performed by this individual. Additionally, the IRS also takes into consideration if this individual is an integral part of the entity that hired them; whether or not they engage in independently established trade or occupation activities and/or have their own business.
Navigating the complexities of independent contractor status can be complex and cumbersome, yet understanding it can help brokers avoid liability and protect against lawsuits. While most real estate agents work independently as contractors, clear contracts should exist between themselves and their brokerage and ensure compliance with IRS regulations. If unsure about your legal standing it’s always wise to consult a tax attorney.
Insurance
Real estate agents are experienced at providing clients with advice regarding property insurance needs, but it’s also wise for them to purchase personal business coverage as well. Errors and omissions (E&O) policies offer invaluable defense in case a lawsuit should arise while carrying out their duties – some brokerages even mandate this coverage!
As a broker, it’s essential to distinguish between employees and independent contractors as misclassification can lead to costly litigation and compliance challenges. This is particularly pertinent for real estate agents, who work under supervision but still possess some autonomy; historically this has made establishing clear distinctions between employee status and contractor status difficult, leading to numerous misclassification suits against real estate brokerages.
Real estate brokers simply cannot dictate every aspect of a real estate agent’s daily work; agents themselves control their own schedule, accounting systems and many other factors that make them legally classified as independent contractors. Therefore, the IRS treats real estate agents (along with direct sellers and some companion sitters) as non-employees for tax purposes – meaning they do not comply with U.S. labor laws nor receive the associated benefits associated with being an employee.
As illustrated by the Monell and Bararsani cases, real estate brokers must carefully consider their relationships with agents so as to prevent costly misclassification lawsuits and ensure adequate insurance coverage is being offered. While certain exceptions exist, an understanding of contractor/employee relationships is key in mitigating any potential risks.
UFG can assist you in clarifying your relationship with real estate agents, meeting business insurance requirements and protecting both you and them by reviewing and advising on appropriate policies to suit your individual needs. In fact, our knowledgeable team at UFG may even negotiate discounted rates if your claims history has been excellent and/or purchasing larger volumes of coverage is considered. Get in touch with us now for more information and contact details!