Why Real Estate Brokerages Don’t Hire Employees

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.

Commissioned salespeople are independent contractors

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.

Real estate brokerages don't hire employees due to statutory carve-outs, the ease of hiring an independent contractor & because commissions attract talent.

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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The onerous process of setting up W-2 employees

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.

Payroll processing

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:

Gusto

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

QuickBooks Payroll

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

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

Patriot Software

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

Employers have to pay federal as well as state unemployment taxes, the latter of which varies by state.

How much are state unemployment taxes?

State unemployment tax is known by various names, such as State Unemployment Tax Act (SUTA) tax, state unemployment insurance (SUI) or even “re-employment tax” in Florida.

They are all effectively state level payroll taxes, typically only paid by the employer to provide unemployment benefits to workers who become unemployed through no fault of their own.

Tax rates will vary by state, industry (i.e. higher rates for the construction industry), how many former employees have filed for unemployment benefits, as well as how long the company has been an employer.

Companies will usually start out with a new employer rate that will eventually go down as they become an established employer. Some states will change the tax rate annually, or there might be a wait of a few years before getting a new, lower rate.

New employer tax rates can vary from as low as 1% in Vermont, Idaho, Iowa, Mississippi and North Carolina to as high as 3.4% in California and Connecticut (or 3.689% if you you include a surcharge in Pennsylvania).

Note that state unemployment tax rates can range pretty dramatically by state, often depending on the industry the company is in. For example, in Kentucky the rate ranges from 0.3% – 9.0%, with the higher end of the range applying for the construction industry. We referenced this article from Patriot Software on tax rate ranges across states.

How much are federal unemployment taxes?

Federal unemployment tax is 6% of the first $7,000 in taxable wages earned per employee. This means that the maximum liability an employer has for each employee is $420. Anything that the employee earns over $7,000 per year isn’t taxed per the Federal Unemployment Tax Act (FUTA).

Even better, employers who pay their state unemployment tax on time and in full are eligible to receive a 5.4% credit against their FUTA tax liability. This means that the federal unemployment tax rate decreases from 6% to 0.6% for responsible employers.

The only caveat is to check that your state is not a “credit reduction state,” which is essentially a state that owes money to the federal government. Or in more formal terms per the IRS, “a state is a credit reduction state if it has taken loans from the federal government to meet its state unemployment benefits liabilities and has not repaid the loans within the allowable time frame.”

The IRS releases the names of states and territories who are credit reduction states after the conclusion of each tax year. For the 2019 tax year, the only state or territory that was penalized is the U.S. Virgin Islands.

Worker’s Compensation

Businesses are required to purchase and maintain worker’s compensation insurance policies which provide cash benefits and/or medical care to workers who are injured or become ill as a direct result of their job.

Rules and regulations vary by state, though most states will require a business to carry worker’s compensation insurance with very limited exceptions.

For example, the only exemptions in New York from worker’s compensation law are for businesses that are owned by a maximum of two people (i.e. sole proprietorship, partnership, corporation owned by a one or two people) with “no employees, no leased employees, no borrowed employees, no part-time employees, no unpaid volunteers (including family members) and no subcontractors.”

However, there are states that are more relaxed about exemptions. For example, in Kentucky employees can fill out Form 4 (only available by contacting the Kentucky Labor Cabinet and asking to be mailed the form) in order to opt out of worker’s compensation, ostensibly so they can preserve their right to sue their employer.

However, this flexibility also makes it easier to do business in Kentucky as smaller, family run businesses with spouses or other family members as employees can opt out of worker’s compensation requirements altogether.

How much does worker’s compensation cost?

Worker’s compensation policy premiums will vary by location and the type of business you are in. Rates will be higher if the insurer deems that your workers are at a higher risk of falling ill or injuring themselves.

We spoke with AP Intego, an worker’s compensation insurance broker referred to us by Gusto, who gave us an estimate of approximately 0.15% per dollar of payroll. That equates to $150 per year for an employee that makes $100,000 in W-2 salary.

They did say that most of the actual insurance providers they work with have a minimum of $500 per year, and to expect another couple hundred dollars in additional state fees, taxes etc.

Essentially, you should expect to pay approximately $700 at a minimum to have worker’s compensation coverage as an employer.

The easy process of hiring an independent contractor

In comparison, hiring an agent on as an independent contractor couldn’t be easier. All brokerages need to do is to associate or approve the licensee in eAccessNY, and then execute an independent contractor agreement which will govern the relationship between the parties including commission splits, desk fees etc.

New agents who just passed the state licensing exam can easily apply for their salesperson’s license online at eAccessNY, and get approved the same day by their sponsoring broker.

Agents changing brokers need to first ask their current broker to disassociate them in eAccessNY, which can take up to 48 hours for the NY Department of State to process.

Once an agent has been disassociated, they simply need to provide their license number to their new sponsoring broker who can then pay $20 and re-associate them with their firm on eAccessNY instantly.

That’s all there is to it. Everything that comes after is up to the individual brokerage, such as onboarding, setup etc.

It’s up to the real estate brokerages themselves on what they choose to do after associating the salesperson’s license on eAccessNY and signing an independent contractor agreement.

As you can imagine, most brokers might want to set up their agents with a corporate email account, a MLS account or other accounts.

However, the government is out of the picture and brokers can proceed however they like, or not at all.

No need to worry about tax withholding

Real estate brokerages do not need to worry about tax withholding when paying out commission splits to their agents. That’s because independent contractors receiving a 1099 essentially operate as their own business, and are responsible for withholding tax themselves (i.e. through quarterly estimated tax payments).

Paying an independent contractor is akin to paying an outside vendor, and in much the same way you don’t need to worry about how they’re going to handle their own tax withholding or filings. It’s simply an expense line item for the brokerage.

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The best agents want to work for commission upside

Real estate agents enter the industry because they want the chance to earn 6% in commission on million dollar listings, just like in the TV shows they’ve watched. No one gets licensed in order to earn a stable salary, especially if there’s a lot of hustle involved, which there always is.

As you can imagine, the best salespeople are naturally going to want to be compensated based on commission. Why would they want to settle for a salary with no upside, if they’re going to be out there hustling and sourcing deals?

Discount brokerages and salaried agents

What about discount brokers who openly promote the fact that all of their agents are on salary? What about their pitch that agents want to work for them because they don’t have to hustle to find their own deals, which are all provided by the company? What about the supposedly lack of conflicts of interest involved when agents don’t work for commission?

We think all of this is baloney. It’s tough enough finding good talent in any industry, let alone real estate sales.

And in an industry where the high performers enter in order to earn commission and dream of big splits on million dollar listings, who do you think brokers offering staid salaries will be able to attract?

Unfortunately, the truth is that by offering salaries these brokers will not be able to attract the best talent, the result of which will be poor customer service as well as results over time.

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Disclosure: Hauseit® and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. No representation, guarantee or warranty of any kind is made regarding the completeness or accuracy of information provided. Hauseit LLC is a Licensed Real Estate Broker, licensed to do business in New York under license number 10991232340. Principal Office: 148 Lafayette Street, New York, NY 10013.

1 thought on “Why Real Estate Brokerages Don’t Hire Employees”

  1. 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.

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