Posted by Fred Lake

Do Realtors Get 1099s?

Do Realtors Get 1099s?

Thanks to real estate agents, you no longer have to deal with the complexities of buying and selling a home. As a client, real estate agents who are licensed professionals generally takes care of finding homes for you, helping you fill out contracts, facilitate negotiations and coordinate close of escrow. However, even though your agent is acting on your behalf in matters relating to a real estate transaction, you still paid his fee indirectly. This means sending him a 1099 at the end of the year is not your responsibility.

Breaking Down Consumer-Agent Relationship

The steps required to successfully close a real estate transaction may be familiar to most of us but if you’re one of those people who have no idea how it works, then you really need to contract the services of an agent to help you take care of the legal process.  When you “hire” a real estate agent, you will sign a buyer or seller agency agreement, however, what you’re actually doing is contracting services of his broker, even if you have personally met the broker. All payments whether upfront or delayed are made to the agent’s broker even though it was your real estate agent who dedicated many hours to your case and develops a close relationship with you as a result.

The Chain of Command of a Broker

The legal authority to facilitate real estate transactions on behalf of consumers is given to real estate brokers because they have the training and hold the license. They are also authorized to utilize the services of licensed, independent contractors, typically referred to as real estate agents, to solicit clients and conduct business with direct supervision. There are large and small real estate brokerage firms. There are those that are run by individuals and those that are run by large corporations. Agents are paid a commission by their brokers when the close of escrow occurs which equates to a percentage of a transaction’s proceeds that you agreed to pay in the agency agreement. 1099s are distributed by brokers to their salespeople annually.

Proceeds and Taxes

The commission received by a real estate broker may amount to thousands of dollars and sometimes, consumers do not pay the broker until closing. According to industry standards, the closing agent which is generally a title company or a real estate attorney should distribute the commission among the involved brokers. Your closing costs including the commission of the broker are stated on the settlement statement in detail or HUD-1, provided to you at closing. Along with other financial paperwork, the settlement statement can be used to figure out deductions when the annual tax return is being prepared.

Important Reminders

It’s in your best interest to avoid working with any real estate agent who asks you to pay him directly since the law clearly states how and to whom real estate commission and fees should be paid. An up to date license on file in the state in which they practice is also required to all practicing real estate agents. If you are not sure about the credentials of an agent, visit your state’s database for online, licensed professions and look up his name. The agent’s credentials can also be checked if you find time to visit his physical office as a broker since they are all required to post copies of the agent’s licenses in a place that is prominent which is usually the office lobby.

For Brokers: How to Report Commission Income

As mentioned above, your sales activity from selling homes will be the basis of your compensation. A certain percentage of the gross commission on any sale will be paid to you. It is based on a predetermined split with your broker any other involved agents. 

Now during tax time, no taxes are generally withheld from that income since your broker will report your income on IRS Form 1099-MISC. The income reported on this form for tax purposes will represent your gross income which will appear on Schedule C of your federal income tax return. Expenses directly related to your business from your gross income will also be deducted to arrive at your net income.

Make sure you make quarterly estimated tax payments since income tax is not withheld. It’s required to make quarterly estimated tax payments since income tax is a “pay as you go” tax and in general, if you believe you owe an amount of $1,000 or more in taxes.

Fred Lake
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