There is a lot about the real estate world the average consumer doesn’t know. For example, many people do not realize that the relationship between real estate agent and agency owner is not the typical employee-employer relationship. Simply put, real estate agents are almost always self-employed.
Yes, some states allow for salaried real estate agents employed directly by real estate brokers. Yet even when such arrangements are allowed, they are rare. The vast majority of real estate agents work as independent contractors underneath local brokers.
Self-Employed for Tax Purposes
Another thing most people don’t know is that self-employment is a designation created by the IRS for tax purposes. The reason for drawing a distinction between employees and contractors is simple: employers are required to withhold and pay taxes on behalf of their employees.
If you work for a company as a standard employee, you receive a regular paycheck with taxes already taken out. The money you pay toward your taxes is held in a special account by your employer. All of the money in that account – yours, combined with money from other employees – gets sent to the IRS on a regular schedule.
This does not happen for self-employed contractors. A real estate agent or broker does not withhold and pay taxes on her behalf. The agent is responsible for paying taxes on her own. Furthermore, she pays them on a quarterly basis.
Working with a Small Business Owner
How real estate agents pay their taxes matters little to clients looking to buy or sell homes. What matters is the level of service they receive. To that end, understand this one thing: when you are working with a real estate agent, you are working with a small business owner. Even though your agent works under the umbrella of a real estate brokerage, he or she operates an independent small business.
Qualifying as an independent contractor under federal law requires adhering to certain guidelines. For example, your real estate agent pretty much controls how she conducts her own business. She determines her working hours. She determines when and how to market the homes she lists. She deals directly with clients independent of broker interference.
Why should this matter to you as a client? Because you want a real estate agent who will willingly look out for your best interests. All successful business owners do just that. They do whatever they can to make customers happy. They know that happy customers tell others – and even come back themselves.
Agents Are Willing to Negotiate
The agents at CityHome Collective, a Salt Lake City real estate brokerage and design firm, say there is another reason that clients need to know that their agents are independent contractors. As small business owners, agents are free to negotiate the agreements they make with clients.
For example, the average residential real estate transaction is subject to a 6% commission. That 6% is normally divided 50-50 between seller and buyer agents. The seller agent, also known as the listing agent, collects the commission and pays a portion to the buyer agent. These two agents can negotiate the commission split between themselves.
It turns out that sellers can negotiate with their listing agents as well. Imagine you are selling a luxury condo in Salt Lake City through CityHome Collective. Because your condo will probably demand a higher price compared to a starter home, your agent might be willing to negotiate a lower commission.
The long and short of it is that real estate agents are self-employed business owners. That gives them a lot of leeway to provide service to their clients as they see fit.