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 IRS Rule about 1099's

Created by:
Christopher Klingaman, Licensed Real Estate Broker,  Spring Lake,  NJ

Date: January 28, 2009, Number of Replies: 2


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Are there any tax attorneys or accountants on RealTalk familiar with NJ Licensing Law? Last week, the NJAR released a statement mentioning an IRS rule that says Offices must fill out 1099's to any individual it pays who is not an employee. So any time a commission is split, the Buyer's Side Agent should be receiving a 1099 along with the check from the listing side Office. The problem is that in NJ, individual licensees don't receive payments - all of the payments are sent to Corporations. The Corporation (who holds the master real estate license) then pays the individual agent. What I'm understanding, is that this particular requirement doesn't apply to any office in the state of NJ and we shouldn't have to worry about it? Can anyone help me out here?

IRS Requires Reporting of Cooperative Commissions

The Internal Revenue Service ("IRS") requires that listing brokers who pay a cooperative commission in excess of $600 to an individual who is not their employee must complete a Form 1099-MISC. While this is not a new law, it has come to NAR's attention that not all real estate professionals are aware of this requirement. Below is a brief description of this issue and links to the necessary forms.

IRS Requirements

The IRS requires individuals that: 1) pay compensation of $600 or more to 2) an individual who is not an employee 3) for services provided 4) during the course of the payor's trade or business to complete Box 7- Nonemployee Compensation on Form 1099-MISC, give Copy B of the form to the individual who received the compensation, and file Copy A with the IRS. "Nonemployee compensation" includes fees, commissions, prizes, and awards, and so would include cooperative commissions and referral fees paid by real estate professionals because these payments are made during the course of their trade or business to nonemployees.

These filing requirements exist even if the listing broker is not directly paying the cooperative commission to the other broker. So, if the cooperative commission is paid by the escrow agent to the other broker, the listing broker may still need to file a 1099-MISC. This is because the funds constituting the cooperative commission are drawn from the listing broker's portion of the commission and so the payment is technically made by the listing broker.

This requirement only applies to payments made to individuals, and does not apply when the payments are made to corporations. Listing brokers should still make it part of their business practice to obtain a completed Form W-9 from anyone to whom it pays a commission, whether it be an individual or a corporation. Property owners do not need to complete a 1099-MISC for the commissions they pay to real estate professionals because this activity is not part of their trade or business.

Here is an illustrative example:

Joe Seller lists his home for sale with real estate broker Don Listbroker. Listbroker places the listing into a multiple listing service and offers a cooperative commission to any MLS participant who brings him a buyer that successfully purchases the property. A client of another broker's salesperson, Julie Buyerep, made an offer to purchase Seller's home. Seller accepts the offer, and the transaction closes. At closing, the escrow agent makes commission payments to both Listbroker and Buyerep's principal broker, Don Broker. Here is who is required to report commissions to the IRS:

Listbroker has an obligation to report the commission payments made to Broker, even though Broker received the commission check from the escrow agent

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Broker has an obligation to report the commission amounts that he pays to Buyerep

Neither Seller nor the buyer have any obligation to report the commissions that their real estate representatives received

Christopher J. Klingaman

Broker of Record

RE/MAX Properties Unlimited

200 North Avenue East

Westfield, NJ 07090

O: (908) 233-9292

F: (908) 233-9902

C: (908) 416-8616

www.NJHomesForYou.com

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Lou Frey Licensed Real Estate Broker,  Santa Fe,  NM

Date: January 29, 2009

The key issue here, I think is the W-9. The W-9 tells you what the receiver tax status is. You are correct, in that a corporation does not need to get a 1099 or for that matter any individual, LLC etc. who gives you a W-9 that says they are exempt from back up withholding. You must have the w-9 to back you up though on what their tax status is.
Personally, I don't think the IRS is going to waste their time on checking W-9's for commission splits at closing but it would be a simple task for the title company to include that in the closing package. Since the owner/broker is not at closing, the independent contractors agreement would have to give the agent authority to sign it.
The 2 bigger issues here though are 1) do your agents sign a W-9 and/or does the IRS allow the independent contractors agreement as a substitute W-9. The second big issue is referrals not paid at closing, you should have W-9s to eliminate the 1099 issue on those.
I do find it strange that NJ law requires any RE brokerage to be a corporation. I don't think that they have the right to tell some one what their legal entity should be.
Lou Frey
Santa Fe Land and Homes
505-670-5001
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Christopher Klingaman Licensed Real Estate Broker,  Spring Lake,  NJ

Date: January 29, 2009

Lou,

Looking through the NJ REC Regs, the "office" could operate as a corporation or partnership. However, there needs to be something (not someone) applying for the master office license.

Christopher J. Klingaman

Broker of Record

RE/MAX Properties Unlimited

200 North Avenue East

Westfield, NJ 07090

O: (908) 233-9292

F: (908) 233-9902

C: (908) 416-8616

www.NJHomesForYou.com

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