Real estate brokerages generally never hire real estate agents as employees because of the extremely onerous process and additional cost involved with hiring an employee vs an independent contractor.
Furthermore, federal and state legislatures both recognize the unique nature of the industry, and have created carve-out statutes specifying that real estate agents are not considered employees.
Lastly, real estate agents join the industry in order to earn commission on million dollar listings, not to earn a meager salary. The best salespeople will always want to work for commission.
We’ll discuss all of these points in the following article, including an in-depth look at the onerous process for hiring an employee vs the simplicity of bringing on an independent contractor.
Real estate agents are typically paid through commission splits on deals they close and are generally classified as independent contractors vs employees in the United States.
This is the case even though state real estate statutes require brokers to exercise supervision over their associated licensees.
Though this would seem to be a direct conflict vs federal labor laws where one of the primary distinctions between an independent contractor and an employee is the employer’s lack of control over the worker, both state and federal legislatures have addressed this unique conflict via statutory carve-outs.
For example, according to this whitepaper by the National Association of Realtors, “there are roughly twenty-two state real estate statutes that contain language expressly permitting a real estate broker to treat their real estate salespeople as independent contractors while simultaneously exercising their mandatory supervisory duties under the statute.”
The IRS makes an exception for the real estate brokerage industry as well on a federal level. The IRS considers real estate agents to be “statutory non-employees” if three factors are met:
The real estate agent must be licensed
Substantially all payments must be directly related to their sales or other output vs hours worked
An agreement exists stating that the real estate agent will not be treated as an employee for federal tax purposes
Even the Affordable Care Act exempted real estate brokers from having to offer health care coverage to their agents.
Managers and administrative staff might be employees
In a typical real estate brokerage, only the office managers and secretarial staff might be employees due to the nature of their duties.
Even though office managers will be licensed themselves, they typically won’t be expected to go out, source and execute deals as part of their role.
As a result, office managers are typically classified as employees due to the nature of their work, i.e. supervising agents at their office.
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Hiring an employee for the first time is enormously complex for first time employers, and the process is made even more confusing by states having different forms, filings, fees, rules, unemployment insurance and worker’s compensation requirements.
Furthermore, on a like for like basis, having an employee is simply more expensive. There are additional vendor costs (i.e. payroll processing) as well as additional taxes (i.e. state unemployment insurance tax, AKA state payroll tax) without factoring in employee benefits which will be expected but perhaps not required.
In order to pay your new employee, you’ll need a payroll processing company who ideally provides “full-service payroll,” meaning they handle everything from direct deposits to payroll and unemployment insurance tax filings and payments.
Make sure to carefully diligence what is included when reviewing vendor options, as many vendors will have hidden set-up fees, fees to mail W-2s, cancellation fees or other fees.
If you must hire an employee, here’s who we recommend based on extensive research, including calls with sales representatives, that we’ve conducted for ourselves:
This appears to be the newest entrant to the space, and we liked this start-up’s website and customer service the best. It was easy to connect with a representative by chat and to speak with someone knowledgeable by phone right away.
Starts at $39/mo + $6/mo per employee
1st month free as of this writing
Quick set-up that takes around 30 minutes
No start-up, cancellation or W-2 year end issuance fees
Automatic state new hire paperwork filing
I-9 and W-4 e-signature and storage
Unlimited phone, email, chat support
Even though QuickBooks has been around for a long time, we were intrigued by their payroll processing service because of the ability to directly integrate it with their very popular accounting software.
We were turned off initially by the inability to quickly speak with a real person. The salesperson we were connected to via live chat had incoming phone calls go straight to voicemail. We did eventually speak to this salesperson and were satisfied enough to seriously consider them.
Starts at $45/mo + $4/mo per employee
50% off the base fee for three months as of this writing
Integrated with QuickBooks accounting software
$5 fee for worker’s compensation integration
ADP may have a reputation for catering to larger companies, but they did have a small business department whom we spoke with. Their salesperson was smart and knowledgeable which was a key selling point for these guys.
The main downside as with many players in this space is the lack of transparency around pricing. It was impossible to find pricing on their website, and you had to submit information and wait to be called by a sales representative to discuss pricing.
Unfortunately, this strategy doesn’t work well for today’s busy consumers. Unless you are truly offering something differentiated that can only be explained discreetly by phone, there’s no reason not to save your potential customers some time by just telling them what your pricing is.
One account representative and main point of contact
ADP takes full liability for any errors in tax filings and withholding
One time set-up fee of $200 which our sales representative waived
$54.95 one time annual filing fee
$5.95 per W-2 issuance fee
We were quoted $500 per year for quarterly payroll
We were told to expect prices to rise with inflation
We found these guys through one of their excellent online articles about state unemployment tax rates. We were intrigued by their relatively low rates, but still turned off by their lack of automatic new hire reporting or filing assistance.
Starts at $30/mo + $4/mo per employee
60 day free trial as of this writing
Free workers’ comp integration
W-2’s can be downloaded for free
1 thought on “Why Real Estate Brokerages Don’t Hire Employees”
I’m considering hiring an employee in New York, but am utterly confused by the myriad of additional requirements New York has. For example, New York seems to be one of the few states that require disability benefits coverage, or State Disability Insurance (SDI).
Additionally, New York also requires employers to provide family leave benefits coverage, which seems to be rare among other states.
Moreover, New York levies an additional Metropolitan Commuter Transportation Mobility Tax (MCTMT). I’m confused however, how much exactly is this additional tax? I always thought this was related to one’s own income tax, and wasn’t an employer payroll tax?
So confused, any help would be much appreciated, otherwise we will probably give up on trying to hire in New York City.