Real agents help home buyers or sellers navigate the complex process of buying or selling a home. These professionals are licensed, experienced, and knowledgeable in finding homes, filing contracts, negotiating, and coordinating the close of escrow. The agent may stand in for you during these phases, but it is not your responsibility as a client to issue 1099 at the year's end. This article contains things you should know about real estate commissions and form 1099.
The IRS issues Form 1099 to real estate agents to pay compensation worth $600 or more before the tax year ends. It is issued to an employer, not an employee, for service rendered by the individual and during the trade or business process. Therefore, you won't need to file a form 1099 if your situation does not fall under any criteria. However, the IRS requires taxpayers to file 1099s to display their income.
The IRS expects you to file a 1099 for your commissions and referral fees. You must also file other compensations you paid to partner brokers, sponsored salespersons, and broker associates. Additionally, the IRS expects you to report compensation paid to licensed or unlicensed assistants either as independent contractors or a person that assists in the business. In essence, as a broker or agent the office awaits your report on 1099 when paying office rent, except if it is paid to a real estate agent or corporation.
You receive your post-split commission from the broker after completing the business. Unlike the W-2 employee, the form does not have withholding, meaning as a real estate agent, you cannot receive a pay stub detailing withholding. Instead, the IRS expects the agent to account for the due taxes.
The broker issues an agent that makes up to $600 in a tax year a 1099-MISC. The Internal Revenue Service encourages that the form is given at the completion of the tax year. You use the form to summarize your commission earnings for the entire year. Agents must file their taxes using 1099, making it easier to determine how much they owe in taxes.
You can pay the taxes quarterly to avoid figuring out their places from the huge income earned during the tax year. In addition, you can have a separate account to deposit the funds and save the required tax portion of the commission, making it easier to file a 1099 at year-end.
If an agent is helping you in buying or selling a property, you are expected to pay the agent commission. Generally, the amount earned at the end of the sale covers both the buyer's agent and the seller's agent's commission. However, the real estate world allows for negotiation, so you may end up paying before that time.
A broker's work is to accept compensation from clients and share it amicably and according to real estate law between their agents instead of paying from their pocket. The broker makes earnings by taking a split from the agent's compensation after completing the transaction. The broker reduces the workload for the agent by taking some legal liabilities from the agent. The commission split depends on brokerage, training, education, and other factors. Every brokerage has a different split ratio which is negotiable between the agent and the brokerage.
The law has who and how to pay the commission and fees. It is best to avoid agents that collect the money directly. Additionally, patronize agents with updated licenses in practice. Ensure you're clear on the agent's credentials or check the online licensed-professions database to verify the agent's claim. You can visit the brick-and-mortar office to verify copies of the agent license at the office lobby.
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Jim McClaflin, EA, NTPI Fellow, CTRC