Real Estate Brokers often hire employees to answer phones, direct office traffic, and coordinate activities with their agents. It is relatively rare for Real Estate Agents who are sole proprietors to have employees. Agents who do generally have such a high volume of sales they require daily or weekly assistance to manage workflow - if this is you, congratulations!
If you’re an agent who has a growing number of listings, you may also benefit from hiring an employee. A well-trained employee to complete crucial but repetitive tasks allows an agent to invest precious time in the Golden Rule of Business: Making current clients happy and getting new clients! Such an assistant may prove a wise investment - even the springboard that takes a business to the next level.
Employee vs. Independent Contractor: If you are seeking administrative help, it is vital to distinguish the difference between employees and independent contractors. Common law defines the employee-employer relationship. It is the nature of the association, not agreement between the parties, that determines whether a worker is an employee or an independent contractor. Employers control employees’ day-to-day activities. Independent contractors, on the other hand, are self-employed business owners and take direction from themselves. If you hire someone to perform specific duties, pay them by the hour, and direct their day-to-day activities, they are most likely an employee under common law. For more information on employees, independent contractors, and the consequences of confusing the two, please read our article Contractor or Employee – A Confusing & Dangerous Question. We even have a comprehensive training course called Employees vs — Independent Contractors.
Employee Benefit Programs: Line 14 on Schedule C deducts costs associated with employee benefits other than those related to employee pension and profit-sharing plans (report these costs on line 19, Pension and Profit-Sharing Plans). The phrase, employee benefit programs, can be confusing because it alludes to a bundle of offerings provided to employees. In reality, they are costs related to many forms of compensation not included as income to the employee. Employee Benefit Programs include costs associated with:
- Health insurance for employees or their dependents
- Accident and group life insurance
- Education Assistance
- Dependent care assistance
- Medical reimbursement programs
- Cafeteria Plan and other benefits not reported as income on the employee’s W2.
It is important to note that many of these benefits have limits and requirements when offered to employees. If you have employees and want to provide such benefits, please consult with a professional who specializes in this area.
Not Employee Benefits: Many items seem to meet the definition of employee benefits that are deducted elsewhere on schedule C or as adjustments to income on Form 1040. These include:
- Contributions or expenses related to the owner’s retirement. These are an adjustment to income on Form 1040.
- Health insurance premiums of the owner, including the cost of protecting the owner’s spouse and dependents. These premiums are also an adjustment to income on Form 1040. The only exception is insurance premiums paid for a spouse (if the policy is in the spouse’s name), who is also an employee of the agent. Deduct such premiums as an Employee Benefit.
- Expenses related to an employee’s pension or profit-sharing plan (deducted on line 19 of Schedule C).
- Workers Compensation Insurance – deduct as insurance on Line 15 of Schedule C.
- Unemployment Insurance. Unemployment insurance is a tax imposed by the state and the IRS and deducted on Line 23, Taxes and Licenses.
- Costs related to vehicles and other property employees are allowed to use. These are deducted on the appropriate lines of the return, depending on the nature of the item.
Take Away: Deducting employee benefits is rare for most real estate agents. Those who have employees, however, must discern employee benefits from other employee-related costs. It is also essential for any agent paying an individual for services to know the difference between an employee and an independent contractor.
Summary and Invite: We hope this article helped you to understand costs deductible as Employee Benefits. If you’d like to learn more about cutting your most significant expense, TAXES, check out our Real Estate Agent Tax Cut Library. The Real Estate Agent Tax Cut Library includes over eight hours of video broken into twenty-nine searchable volumes and covers every possible deduction a Real Estate Agent can take on their tax return. Our Broker Version will help your entire agency cut their taxes! We also invite you to browse our courses.