Independent contractor

Key Takeaways

• An independent contractor works under a written agreement and controls how the work gets done, while an employer directs how an employee performs the job.
• A real estate firm withholds no income tax or payroll tax from an independent contractor's commission, so the licensee handles those payments directly.
• Independent contractor status is a tax and employment classification, and it does not reduce the firm's duty to supervise its licensees.
• In Washington, services performed by a real estate broker are excluded from the term 'employment' for unemployment insurance to the extent the broker is compensated by commission (RCW 50.04.230).

What It Means

An independent contractor is a worker engaged under a written agreement to deliver a result while keeping control of how that result is produced. An employee is told how, when, and where to work. An independent contractor decides those things, carries the business expenses, and is paid with nothing withheld for income or payroll tax.

Most real estate licensees work this way. A broker affiliates with a firm, signs an independent contractor agreement, and then sets their own hours, prospecting methods, marketing budget, and client load. The firm pays commission when a sale closes rather than a wage for hours worked.

Federal tax law has a specific category for this. The Internal Revenue Service treats a licensed real estate agent as a Statutory Nonemployee, taxed as self-employed, when substantially all payments for their services are directly related to sales or other output rather than to the number of hours worked, and their services are performed under a written contract providing that they will not be treated as employees for federal tax purposes. Both conditions have to hold, so the paperwork on its own does not settle the classification.

How It Works in Washington

Washington recognizes the arrangement for unemployment purposes. RCW 50.04.230 provides that the term employment does not include service performed by a real estate broker to the extent he or she is compensated by commission, so commission income does not build unemployment insurance coverage the way wages do.

What the status does not change is supervision. RCW 18.85.201 places responsibility for the conduct of a broker, managing broker, or branch manager with the Designated Broker to whom the licensee is licensed, and WAC 308-124C-125 sets out that designated broker's responsibilities. Being an independent contractor for tax purposes buys a broker no independence from the firm's duties under license law. The firm still supervises the work, still keeps the transaction records, and still routes every commission through the designated broker under RCW 18.85.301. A licensee who reads independent contractor status as permission to operate outside firm oversight has misread it.

Example

Tomas affiliates with Rainier Properties as a broker and signs an independent contractor agreement stating that he will not be treated as an employee for federal tax purposes and that he is paid from sales output rather than hours worked. He sets his own schedule, pays his own multiple listing service dues, and covers his own vehicle and marketing costs.

When a sale closes, Rainier pays Tomas his commission share of $5,400 with nothing withheld, and reports the payment on a Form 1099 Nec rather than a W-2. Tomas budgets for income tax and Self Employment Tax out of that $5,400 and makes his own estimated payments during the year.

None of that loosens the firm's grip on the file. Tomas's managing broker still reviews the purchase and sale agreement, still requires the signed agency disclosure, and still files the documents in the firm's transaction folder, because supervision follows the license rather than the tax form.

Common Mistakes and Exam Traps

• Independent contractor status does not move supervision. In Washington, responsibility for a broker's conduct rests with the firm's designated broker (RCW 18.85.201).
• An independent contractor licensee is still licensed and still affiliated with a firm. Independent does not mean the broker may practice outside a firm.
• A written agreement calling someone an independent contractor does not settle the question by itself, because how the work is directed and how the pay is calculated also matter.
• The unemployment exclusion in Washington reaches a broker's services only to the extent the broker is compensated by commission, so it is tied to how the licensee is paid (RCW 50.04.230).