ADRE Model Broker Policy Manual-Annual 1099 Report

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Annual 1099 Report

This section should cover:

  • What IRS 1099 forms will include and exclude (such as any deductions) and who pays deductions.
  • Earnings that are paid out of escrow or assigned should be included on the 1099 form.

imagesADDITIONAL COMMENT:

Have you paid (or earned) a cooperative commission in the last year? Then you’ll need to complete Form 1099-MISC in the coming weeks. Commissions over $600 paid to non-employees warrant the need to for the 1099. Not sure who needs to file? Here is more information via NAR:

IRS Requires Reporting of Cooperative Commissions

The Internal Revenue Service (“IRS”) requires that listing brokers who pay a cooperative commission more than $600 to an individual who is not their employee must complete a Form 1099-MISC. While this is not a new law, it has come to NAR’s  attention that not all real estate professionals are aware of this requirement. Below is a brief description of this issue and links to the necessary forms.

Quick Quiz

Fill in the Blank:

that are paid out of escrow or assigned should be included on the form. 

IRS Requirements

The IRS requires individuals that:

*pay compensation of $600 or more to
*an individual who is not an employee
*for services provided
*during the payor’s trade or business

to complete Box 7- Non-employee Compensation on Form 1099-MISC, give Copy B of the form to the individual who received the compensation, and file Copy A with the IRS. “Non-employee compensation” includes fees, commissions, prizes, and awards, and so would include cooperative commissions and referral fees paid by real estate professionals because these payments are made during their trade or business to non-employees.images (1)

These filing requirements exist even if the listing broker is not directly paying the cooperative commission to the other broker. So, if the cooperative commission is paid by the escrow agent to the other broker, the listing broker may still need to file a 1099-MISC. This is because the funds constituting the cooperative commission are drawn from the listing broker’s portion of the commission and so the payment is technically made by the listing broker.

This requirement only applies to payments made to individuals and does not apply when the payments are made to corporations. Listing brokers should still make it part of their business practice to obtain a completed Form W-9 from anyone to whom it pays a commission, whether it be an individual or a corporation. Property owners do not need to complete a 1099-MISC for the commissions they pay to real estate professionals because this activity is not part of their trade or business.

Quick Quiz

Fill in the Blank:
This is because of the funds the cooperative commission are drawn from the listing broker’s portion of the commission and so the is technically made by the listing .

Here is an illustrative example:

Joe Seller lists his home for sale with real estate broker Don Listbroker. Listbroker places the listing into multiple listing services and offers a cooperative commission to any MLS participant who brings him a buyer that successfully purchases the property. A client of another broker’s salesperson, Julie Buyer, made an offer to purchase Seller’s home. Seller accepts the offer, and the transaction closes. At closing, the escrow agent makes commission payments to both Listbroker and Buyer Rep’s principal broker, Don Broker. Here is who is required to report commissions to the IRS:

Listing Broker has an obligation to report the commission payments made to buyer’s Broker, even though Broker received the commission check from the escrow agent.

Listing Broker has an obligation to report the commission amounts that he pays to Buyer Broker.

Neither Seller nor the buyer has any obligation to report the commissions that their real estate representatives received.

Reporting Deadlines and Other Information

For example, for the 2009 tax year, all 1099-MISC Copy B forms must be sent to payment recipients by February 1, 2010. The IRS must receive Copy A by March 1, 2010. If the taxpayer files electronically, they have until March 31, 2010, to file Copy A (note there are certain software requirements for filing electronically with the IRS). Below are links to the IRS’s instructions for completing Form 1099-MISC and also the Form itself.

http://www.irs.gov/pub/irs-pdf/i1099msc.pdf

In order to complete the 1099-MISC, a taxpayer needs to obtain certain information from the recipient, such as a social security number or an employer identification number. Brokers should obtain this information by giving Form W-9 to every broker to whom it pays cooperative commissions (or causes to be paid) and requests that the cooperating brokers return a completed Form W-9 to the taxpayer. This form will give the taxpayer sufficient information to complete the 1099-MISC and will also inform the taxpayer about whether the cooperating broker is an individual or a corporation.

Quick Quiz

Fill in the Blank:
In order to complete the 1099-MISC, a needs to obtain certain information from the recipient, such as a social security number or an employer identification .

Remember, if the cooperative commission is paid to a corporation, the taxpayer does not need to file a Form 1099-MISC. However, it is recommended that the taxpayer makes it part of its risk management policies to obtain the W-9 from all cooperating brokers, to demonstrate that it verified the corporate status of the cooperative broker. If the cooperating broker refuses to return the W-9, the taxpayer can still check the corporate status of the cooperating broker by checking its secretary of state’s website.

Below is a link to Form W-9 and the accompanying instructions.

http://www.irs.gov/pub/irs-pdf/fw9.pdf

TO COMPLY WITH CERTAIN U.S. TREASURY REGULATIONS, WE INFORM YOU THAT, UNLESS EXPRESSLY STATED OTHERWISE, ANY U.S. FEDERAL TAX ADVICE CONTAINED IN THE TEXT OF THIS COMMUNICATION, IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY ANY PERSON FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER THE INTERNAL REVENUE CODE.

Anti-Trust Compliance

This section should include:

  • Compliance with the anti-trust laws, describing the conduct and results that are to be avoided, such as Sales Associates and employees must take special care to avoid discussion with employees and Sales Associates of competing firms regarding the commission policy of the Company that could be construed to be agreements or conspiracies to fix, establish prices or otherwise restrain competition in violation of state and federal anti-trust laws.

For information from NAR on Antitrust and the Real Estate Brokerage Firm: www.realtor.org/letterlw.nsf/pages/0802antitrust?OpenDocument&Login

Quick Quiz

Fill in the Blank:
with the anti-trust laws, describing the conduct and results that are to be avoided.

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