The vast majority of commission-paid real estate agents are what we call Statutory Nonemployees. They are not employees as a matter of law and do not receive wages. Instead, they are independent contractors. They are in business for themselves. Traditionally, agents have received Form 1099-MISC from their broker(s) to report their earnings. However, starting in 2020, they began to receive Form 1099-NEC, which replaced Form 1099-MISC for reporting self-employment income.
Although Real Estate Agents do not receive wages, it is not uncommon for them to pay employees. Employees help agents increase efficiency and maximize income. Wages and salaries paid to these employees get deducted as Wages on line 26 of Schedule C.
What Counts as Wages? Wages include any payments for salaries, bonuses, commissions, and other forms of taxable compensation. Wages reported on Schedule C include any “pre-tax” deductions, including many tax-free fringe benefits and retirement deferrals such as those made to 401k or 403b programs.
Perhaps, the easiest way to find the amount to report as wages is to look at Box 5 of Form W3, Transmittal of Wages and Tax Statements. Box 5 of Form W3 lists the total Medicare Wages and Tips reported to employees before subtracting income-tax-free benefits and deferrals.
Avoiding a Major Mistake: A potentially fateful mistake made by many small business owners is misclassifying common-law employees as independent contractors. Making this mistake is easy. The line separating the employer-employee relationship from a business and independent contractor relationship is blurry and highly subjective. However, crossing this line for a single worker can result in years of back taxes and numerous headaches. Misclassify more than a handful of employees as contractors, and the result can quickly sink a small business.
No single article can discuss the factors that differentiate an employee from an independent contractor. If you are interested in learning more about the topic, check out our Employee vs. Independent Contractor Training Course. In the meantime, if you pay individuals who are not in control of all aspects of their work, be careful. These workers may be employees.
Summary and Invite: We hope this article advances your understanding of wages deducted by self-employed Real Estate Agents. If you’d like some assistance cutting an agent’s highest cost - taxes, download our Real Estate Agent Tax Organizer.
If you’re extra-serious about minimizing taxes, check out our Real Estate Agent Tax-Cut Library. It contains over eight hours of tax-cutting information broken into twenty-nine searchable volumes. It’s also tax-deductible and pays for itself with the deductions you will find. Want to share your tax-cut with the whole agency? Check out our Broker Version of the Library.