If you are a real estate broker or agent, you may not be aware of the IRS reporting requirements surrounding cooperative commissions. This article explains what you need to know about 1099s, W-9s and CDAs.
As part of every real estate transaction where commissions are distributed, the IRS requires listing brokers to complete Form 1099-MISC if cooperative commission in excess of $600 is paid to an individual who is not an employee of the brokerage firm. Brokers should also file 1099s for referral fees or other compensation over $600 paid to cooperating brokers, broker-associates or sponsored salespeople, as well as any independent contractors who provide services to the business.
While this reporting requirement is not new, many real estate professionals are not aware of the obligation to file Form 1099 because commissions are typically distributed through the escrow agent. Even though the escrow agent distributes the funds, the cooperative commission is drawn from the listing broker’s portion of the commission and technically made by the listing broker, which is why the filing responsibility falls on the listing brokerage firm.
There’s a catch: The responsibility to file Form 1099 only applies to commissions made payable to individual agents, but it does not apply when payments are made to corporations. While this may be true, it is in the best interest of the real estate business to obtain Form W-9 from both individuals and corporations if any commission is exchanged in a transaction. It is also a best practice to obtain W-9s before commission is disbursed.
If you are the seller of the property, property owners are not required to file Form 1099 for commissions paid to real estate agents because it is not part of a trade or business transaction.
An IRS W-9 Form is a document to be completed by the recipient of the funds, which provides the real estate professional with the necessary identifying information to file Form 1099. Business owners are required to obtain Forms W-9 from their vendors to not only determine whether 1099 reporting is required, but it is also to ascertain whether backup withholding is required.
Real estate professionals may also be familiar with a Commission Disbursement Agreement (CDA). This signed document instructs the title company to allocate funds directly to cooperating brokers and salespeople at the time of closing; however, this agreement does not rescind the responsibility of the listing broker from filing Form 1099-MISC even though the transaction did not go through the listing brokerage.
If you are learning about these reporting requirements for the first time, you still have a few months to prepare before the deadline.
In general, the deadline to file Form 1099-MISC with the IRS is by January 31, 2020 for commissions paid in 2019. The payee must also receive a copy of Form 1099 no later than January 31, 2020.
If you have any questions regarding these real estate cooperative commissions reporting requirements, please don’t hesitate to contact me at email@example.com or (805) 963-7811. As the chair of BPW’s real estate practice, our department has extensive experience untangling the complexities of the tax code in the real estate industry and looks forward to helping you navigate the best possible outcome for your situation.