Q: Many agents are working at additional jobs as employees, receiving a W-2. Since that obviously involves the agent’s time, can you address this? Would that be a red flag to the IRS? Wouldn’t that mean an agent should be even more diligent documenting her activities in her real estate business?
If her job involves 40 hours per week, will she still be able to use her real estate expenses as deductions?
A: This scenario usually poses no problem for real estate agents. This is because most real estate agents have a very special tax status. Ordinarily, they are classified as statutory independent contractors (also called statutory nonemployees) for federal tax purposes. This means they are automatically considered independent contractors by the IRS, no matter how many other jobs they may have, or whether they would qualify as independent contractors under the ordinary IRS rules that stress the right of control exercised by the hiring firm.
Why do real estate agents have this special status? Because they have a very good lobby in Washington, D.C.
To qualify as a statutory independent contractor, a real estate agent must by duly licensed and meet two threshold requirements:
- the agent’s pay must be based on sales commissions, not on the number of hours worked, and
- there must be a written contract with the hiring firm providing that the agent will not be treated as an employee for federal tax purposes.
If an agent qualifies as a statutory independent contractor, no federal tax need be withheld from her pay. The agent will pay taxes on her agent income herself, just like any other independent contractor. By the way, for these purposes, real estate agents include real estate appraisers whose pay is based on sales or other output.
Note, however, that statutory independent contractor status applies only to federal taxes: income tax, Social Security and Medicare tax, and federal unemployment taxes. It does not apply to state income taxes. Many states do not have a statutory independent contractor classification for real estate agents. The normal rules applicable to all works apply in these states.
Even if an agent doesn’t qualify as a statutory independent contractor, working as an employee while also engaging in real estate sales need not pose a problem with the IRS. It is not uncommon for a person to work a full-time job as an employee and have a separate business on the side doing something else. This is fine so long as he or she is engaged in a bona fide business as an independent contractor. If so, his or expenses are deductible, the same as for any other business.
An activity does not have to be full-time to qualify as a business. Nor are you limited to engaging in only one type of income-producing activity at the same time. For example, a person could work full time as an employee schoolteacher and have a real estate sales business on the side.
Where a person who does not qualify as a statutory independent contractor can definitely run into a problem is where he or she performs the exact same services as both an employee and an independent contractor for the same hiring firm. But this is not a common scenario for real estate agents.
In any event, it’s always a good idea for you to carefully document the time and effort you put into your real estate business, as well as keeping track of all your expenses.
Q: Is it true that some people will not be allowed to file their returns early this year?
A: Yes. The IRS has announced that all individual taxpayers who itemize their deductions on their returns will not be allowed to file their returns until mid- to late February. This is intended to give the IRS time to reprogram its processing systems to incorporate the many tax law changes enacted by Congress last December. Congress doesn’t usually wait until so late in the year to make such major tax changes.
Only about one-third of all taxpayers itemize; but most of these are homeowners who deduct their home mortgage interest and property taxes. Other itemized deductions include charitable deductions, medical and dental expenses, state and local taxes, and unreimbursed employee expenses. Taxpayers claiming the higher education tuition and fees deduction or educator expense deduction will also be required to wait to file.
The IRS will announce a specific date in the near future when it can start processing itemizers’ tax returns. In the meantime, affected taxpayers can start working on their tax returns, but they should not submit their returns until IRS systems are ready for them. Except for those facing this delay, the IRS will begin accepting electronically filed returns on Jan. 14, 2011.
There is also some good news on the tax filing front: Taxpayers will have until Monday, April 18 to file their 2010 tax returns and pay any tax due because Emancipation Day, a holiday observed in the District of Columbia, falls this year on Friday, April 15. By law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have three extra days to file this year. Taxpayers requesting an extension will have until Oct. 17 to file their 2010 tax returns.
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.