Federal and state employee classification laws, as well as state real estate licensing laws, apply to a broker`s classification of its sellers. At the federal level, the Internal Revenue Service has created a special non-employee legal status for real estate professionals that qualifies them as independent contractors if all of the following requirements are met: Legally, the main difference between employees and independent contractors is the degree of control of the company over the individual employee. If the company has significant control, that person is likely to be considered an employee. But if the company has very little control and individuals in their role have the freedom to do their jobs at will, they are more likely to be classified as independent contractors. In your real estate business, your obligations to independent contractors are much less than to your employees. Although your real estate agents work under your supervision, they retain some independence and control over their work and you are not required to comply with U.S. labor laws regarding the independent contractor relationship. Instead, they are independent contractors who work with an agency or broker, and not necessarily for them. And all their income is based on commissions. There are several reasons why this is the case.

But it is beneficial for both parties involved, real estate agents and the real estate agent himself. In this guide, we explain how this metric works. Why brokers prefer it this way and why many agents don`t want to be employees. So, if you are considering becoming an agent yourself or are simply interested in the process, this article is for you. So let`s dive into the heart of the matter and learn all about the relationship between the real estate agent and the broker. Clearly, the court found that the defendant`s right to control its employees far outweighed the factors suggesting an independent contractor relationship. It`s not obvious that Raveis` offices operate so differently from most real estate agencies across the country. What does this mean for the real estate industry? Employers have a significant degree of control over their employees and can determine when, how and where employees perform their duties and responsibilities.

Employers also often provide their employees with the necessary “tools”. In contrast, an independent contractor can generally determine when, how and where to perform their work and is responsible for any tools or equipment necessary to provide the services. No, if the independent contractor meets all three elements of the IRS split. The IRS recognizes the uniqueness of the real estate industry and has created a legal non-employee status for real estate professionals, provided that three elements are met: 1) the person is a licensed real estate professional; (2) in essence, all their payments are directly linked to turnover or other production and not to the number of hours worked; and (3) their services are provided under a written contract that provides that they will not be treated as employees for federal tax purposes. If these three elements are respected, no federal income tax should be withheld from the income of the real estate professional. Responsibility for one`s own work plans, business functions, accounting systems and other activities in the course of business are the characteristics of an independent contractor. In this case, there should be a written contract or agreement between the contractor and the company. Regardless of everything else, brokers prefer that real estate agents don`t work like regular employees. It is much more difficult to do this than to hire an independent contractor. The process of setting up a W-2 employee takes much longer.

It requires much more paperwork than an independent contractor (or “legally required non-employee”). There is also more risk in paying a salary because not all agents do business and do brokerage money. Are you an independent contractor or an employee? Sometimes it`s not always an easy question for real estate agents. Although some real estate agencies are able to function well without mandatory meetings, time on the ground, etc., they are exceptions. The office without structure, requirements, direction or regulation is usually not an office capable of competing well in the free market, which is the lifeblood of the real estate industry. This may lead to the inevitable conclusion that the industry may need to get used to treating salespeople like employees. Both of these results would also be bad for the real estate industry. And these are the main reasons why real estate agents prefer to work on commission rather than for a salary. The earning potential when working on the commission is almost unlimited. The better you do it, the more you earn.

A wage limits their ability to earn money and leads to laziness and lower productivity in the long run. A white paper from the National Association of REALTORS® deals with the topic of independent contractors. .