Times are tough for many real estate agents. As a result, many agents are working at additional jobs as employees, often full-time, and carrying out their real estate sales activity on the side. If an agent works as an employee in someone else's business, does it make it more difficult for his or her side real estate business to qualify as a bona fide business for IRS purposes?
This scenario usually poses no problem for real estate agents. Most real estate agents have a very special tax status. Ordinarily, they are classified as statutory independent contractors (also called statutory nonemployees) for federal tax purposes. This means they are automatically considered independent contractors by the IRS, no matter how many other jobs they may have, or whether they would qualify as independent contractors under the ordinary IRS rules that stress the right of control exercised by the hiring firm.
Why do real estate agents have this special status? Because they have a very good lobby in Washington, D.C.
To qualify as a statutory independent contractor, a real estate agent must by duly licensed and meet two threshold requirements:
- the agent’s pay must be based on sales commissions, not on the number of hours worked, and
- there must be a written contract with the hiring firm providing that the agent will not be treated as an employee for federal tax purposes.
If an agent qualifies as a statutory independent contractor, no federal tax need be withheld from his or her pay. The agent will pay taxes on his or her own agent income, just like any other independent contractor. By the way, for these purposes, real estate agents include real estate appraisers whose pay is based on sales or other output.
Note, however, that statutory independent contractor status applies only to federal taxes--income tax, Social Security and Medicare tax, and federal unemployment taxes. It does not apply to state income taxes. Many states do not have a statutory independent contractor classification for real estate agents. The normal rules applicable to all workers apply in these states.
Even if an agent doesn’t qualify as a statutory independent contractor, working as an employee while also engaging in real estate sales need not pose a problem with the IRS. It is not uncommon for a person to work a full-time job as an employee and have a separate business on the side doing something else. This is fine so long as he or she is engaged in a bona fide business as an independent contractor. If so, his or her expenses are deductible, the same as for any other business. An activity does not have to be full-time to qualify as a business. Nor are you limited to engaging in only one type of income-producing activity at the same time. For example, a person could work full-time as an employee schoolteacher and have a real estate sales business on the side.
Where a person who does not qualify as a statutory independent contractor can definitely run into a problem is where the person performs the exact same services as both and employee and an independent contractor for the same hiring firm. But this is not a common scenario for real estate agents.
In any event, it’s always good idea for you to carefully document the time and effort you put into your real estate business, as well as keeping track of all your expenses.
For more information on this and other tax issues for real estate agents and brokers, refer to The Real Estate Agent's Tax Deduction Guide, by Stephen Fishman (Nolo).