How do I pay this employee without the double tax issues?

Question

We need to hire a full time real estate agent for our company. We are not a brokerage, so they will need to keep their license at their current brokerage. However, we will be paying them a salary, and they will give us their commision that they receive on the transactions. How do we do this for tax purposes since they will receive a 1099 from their broker for the commison, and then a W2 from us? Would they just file there taxes, showing the payout to us from the 1099, thus expenses equal to the 1099 and then pay taxes off the W2 amount? Thanks for your help.

Answer 1

You'll give them a W-2. You'll have to report the commissions they give you as business income. Keep bank records for all of these commission transactions. They can file their taxes as a proprietorship, using a K-1 form. On that form, which amounts to a simple balance sheet, they'll use the earnings from the 1099, including commissions paid by their broker, as income. Then they'll be able to write off the commissions they paid you as business expenses, thereby subtracting them from their income. Any accountant will be able to do this easily for you. An easier way to do this would be to have the commissions paid directly to your business. In that case, they could use a 1040.

Answer 2

The agent earns commission as an independent contractor, hands over the commission to you, you hand it back to the agent as salary, paying employee SS and Medicare. The agent then pays double SS and medicare as an independent contractor, and then pays employee SS and Medicare again for the same money passed through your company as salary.

Why don't you draw up an employment agreement where the employee/real estate agent is paid net of commissions that are generated? If the commissions don't equal the salary, have the brokerage split the commissions between you and the broker. The part of the commission going to you can pay for the office space, etc. The agent would accept a lesser commission, and your company gets a fee for whatever service that is provided to the agent.

That way, the agent keeps the commission earned, and is paid for the services provided to you. The agent then files as an independent contractor and an employee. You do not have to pay SS and medicare on all the money that is passed through from the brokerage, only on the payment for the brokerage that is in return for whatever (deductible) service you provide the agent.

Answer 3

The would not file a form K-1 for their proprietorship. They would file a Schedule C if it is reported on their 1040.

A K-1 is used to report someones share of a Partnerships or S-Corporations business income. It is kind of like a w-2 form or a form 1099.

Answer 4

I believe you only need to worry about the taxes on the salary. the 1099 is for an independent contractor and thus they have to worked that out with their accountant. Talk to your payroll company or your own accountant. Hope this helps.

The Syko Ward

Answer 5

In most states, it's illegal for them to give you their commissions because you do not have a real estate license. They could lose their license and you would be fined.