requires whats called the safe harbor test to establish that

Chapter 23 Broker-Sales Associate Relationship Flashcards IRS Code Section 3508Federal tax laws allow real estate licensees to be classified as independent contractors. In order to qualify, the IRS requires what's called the safe harbor test to establish that a person is indeed an independent contractor.The three

conditions of the safe harbor test are:The person must be a

properly licensed real estate licensee.Gross income, including that which results from sales and all other output (including the performance of services), must be based on production and not on hours worked.A written agreement must exist between the independent contractor and the broker which outlines the services to be performed by the contractor and states that the contractor will not be treated as an employee for income tax purposes.What are the sales associate requirements? Most brokers expect their licensees to have a good car with adequate insurance that would cover any liability that could happen when showing property. Errors and omission insurance is also important and is usually paid by the licensee through the broker, but the broker could choose to provide it.Recommended FormsAs we mentioned on a previous page, the broker must file yearly the IRS Form 1099-MISC for any independent contractor licensee who earns more than $600. The broker should provide a copy of this form, which repots the licensee's total earnings for the year, to the licensee for his or her records.The licensee should track his or her earnings carefully and make sure that his or her record of earnings matches what the broker has submitted to the IRS. The licensee should also be vigilant in keeping records of expenses, so that he or she will have complete and accurate information when it comes time to file the federal and state income tax returns.What are miscellaneous benefits?Some brokers provide incentives to successful licenses that allow them to attend educational seminars that are provided by various real estate boards. A broker may allow a licensee to purchase a personal residence without having to pay a listing or selling commission or at a significantly reduced commission.Substance Over FormEven with a written independent contractor agreement in place, both parties must recognize that the broker still has a duty to supervise his or her licensees. This duty is first and foremost in their agreement.

Who pays the expenses?Some expenses will probably be paid by the broker with the rest falling to the licensee. The licensee needs to know who will pay for which. These expenses include "For Sale" and "Open House" signs and flags, business cards, stationery, literature, brochures, newspaper ads, telephone charges, forms, trade magazines, membership in the local Chamber of Commerce yellow page ads, Internet websites and e-mail addresses.Here is a list of important things to look for when choosing a broker/firm.Quality training programs are available in-house and locally.The broker encourages and supports training.The broker provides a mentor program and/or office assistance for the licensees.The firm has a large selection of books, audios, videos and CDs on hand for licensee use.The office is dedicated to the licensee's desired specialty area.The firm employs a number of successful licensees.The licensees have a long history with the firm.The firm feels like a "good fit." BalanceHowever, both licensees and brokers must realize that different sales associates will require different levels of supervision. In most cases, a licensee with experience will not need the level of supervision that a new licensee will need. So the broker will have to exercise some degree of judgment when deciding how much supervision to provide to a particular licensee Broker SupervisionThe way the IRS treats a sales associate - as either an employee or an independent contractor - applies to the issues of income tax and withholding obligations. It has nothing to do with the broker's liability for any wrongful acts performed by the licensee.Oklahoma requires that brokers supervise all their salespeople, regardless of their income tax classification. Even though a sales associate may be classified as an independent contractor, the broker is still responsible for the licensee's professional actions.enter into a written agreement with each affiliated licensee.including but not limited

to:SupervisionDutiesCompensationDuration (this term, as

used here, is not meant to indicate a specific termination date, but to allow the parties to negotiate the term of the agreement, whether "at will" or a specific length of time)Termination (how the agreement is renewed or terminated, and that these provisions be included in the agreement)The employing broker must give a copy of the employment agreement, including any modifications, to every employee and independent contractor.Staff MeetingsAll staff benefit from attending sales meetings and company meetings that are informative and educational. It

is the job of management to present learning opportunities as often as is practical to help the licensees be informed and educated in modern real estate practices and associated knowledge such as termite inspections, radon gas problems, layoffs at manufacturing plants in the area, etc.

workers' compensation coverageIt also seems that brokers are not protected from any injury claims that may be made by any of their independent contractors, so it would be wise for brokers to carry workers' compensation coverage for everyone who works for them.Transaction recordsAccording to the real estate license law in many states, the brokerage firm is responsible for keeping a file on every real estate transaction. The file must contain all agreements, contracts, documents, leases, closing statements and correspondence for each real estate or business opportunity transaction. For sales transactions, the file must also contain a copy of the earnest money agreement, a copy of the final settlement statement, and any addenda related to the accounting or disposition of client funds.Sales Associate CompensationThe broker can choose to pay the sales associate a salary or a percentage share of the commission from the transaction.Many companies have a payment plan that is "graduated." In this type of program, a licensee may start out at a lower percentage payment, but then graduate to higher percentage rates as his or her production increases.Other companies have a 100% commission plan.In this situation, the licensee pays a monthly fee to the company to cover the costs of things like office space, telephones, office equipment and supervision. In return, the licensee receives 100% of the commission from any sales he or she negotiates. Most often in these programs, the licensee is responsible for the costs of advertising and promotion.A broker can hire a sales associate as:An employeeAn independent contractorThe main difference between the two is an issue of control, as established by income tax laws.An employee works under the supervision and control of the broker.An independent contractor is hired to perform certain acts, but the broker cannot control how the sales associate performs those acts.What are the start-up costs?Some brokers charge a monthly fee for a desk and a fee to have a telephone line.Tax records and expense recordsAs independent contractors, these records are particularly important as documentation for the licensee's tax return.Also, depending on the written agreement the licensee has with the broker, he or she may need specific expense records and receipts for reimbursement of some of those expenses.