Independent Contractors: Clearly Independent?

Real estate is expected to be cushioned from government scrutiny of independent contractors.

April 1, 2010

There’s a flurry of activity in the nation’s capital to clamp down on U.S. workers that are misclassified as independent contractors. Although some experts contend that the problem stems from ambiguities in the law, the government says far too many businesses are using incorrect employee classifications to avoid paying Social Security, Medicare, and unemployment insurance taxes.

What does this mean for those who work in the real estate industry?

"For real estate, sales associates’ status as independent contractors is very well defined in law and laid out very simply," says J.D. Rinehart, vice-chair of the NATIONAL ASSOCIATION OF REALTORS® Federal Taxation Committee. "We’re in good shape, so as long as we continue to adhere to these very well-established criteria."

However, he adds, Washington’s focus on employment status is a good reminder for brokers and sales associates to exercise care in their recordkeeping and tax filing.

A Growing Problem

Congress last year started looking into misclassification of employment status in an attempt to get a handle on a problem that the U.S. Department of Labor says is huge—possibly applying to as much as 30 percent of the country’s workforce.

This year, the government’s focus intensified. In early February, the Obama administration included money in its fiscal year 2011 budget proposal to fund an effort by the Department of Labor and the U.S. Treasury to ramp up investigations of employee misclassification, with potential audits of as many as 6,000 businesses. 

In Congress, Sen. John Kerry (D-Mass.) and Rep. Jim McDermott (D-Wash.) have introduced the Taxpayer Responsibility, Accountability, and Consistency Act, S. 2882 and H.R. 3408, which would help eliminate ambiguities in the definition of independent contractor, among other effects.

Keep Good Records

Much, if not all, of any stepped-up enforcement would likely bypass real estate, NAR analysts say. There is none of the ambiguity over independent contractor status in real estate because the industry since 1984 has been governed by a unique statutory provision, Sec. 3508 of the Internal Revenue Code, that provides three very clear criteria by which brokers are to classify that their associates are independent contractors.

In accordance with this rule, when sales associates are hired they have to 1) have a valid real estate license, 2) be made aware they’ll be treated as an independent contractor, and 3) acknowledge that their compensation isn’t based on hours worked but on commissions earned.

"Independent contractor status is really very standardized in our industry," Rinehart says.

That’s not to say there’s no chance some brokers or associates will get caught in the crossfire should the government launch a crackdown, as it plans to do. To ensure they’re on the right side of the law, brokerages should review their hiring procedures and forms to be sure that both the broker and all sales associates have agreed in writing on the three IRS criteria.

Also, sales associates should save all of their documentation on business-related expenses so it’s clear they—and not their broker—are covering all of those expenses, says Rinehart.

"The IRS understands sales associates are in business for themselves," he says. "The government isn’t trying to catch people who are doing it right, just those who are doing it wrong. So just be sure you document everything."

Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.