Independent contractor or not

Real estate agent Joe operates as a corporation, only owner, only employee.

Checked the website and Joe has a team, Mary, sales associates and Jane, marketing manager.

I am told that Mary and Jane are both paid as 1099 employees. The burden of proof for independent contractor is not me, the TPA

Joe wants to set up DB and 401k plans.

So, what is wrong with this picture?

The Department of Labor just released its final rule (January 9th) on determining who is an independent contractor.  Attached is a good summary of the rule.

You are correct that the burden of proof is on the employer, and you may want to send Joe a copy as a courtesy FYI. 

At an opportune time before setting up any plans, consider having a conversation with Joe about the severe consequences of setting up the plans should the DOL decide that Mary and Jane are in fact employees and the IRS discovers that they are not included in the plans.

If Joe still wants to move forward, you will need to give some very serious thought about whether you want to do business with Joe.

Personally, unless Joe can provide documentation that Mary and Jane truly are independent contractors, I would not do business with Joe.

DOL final rule adopts 'economic realities' test for independent contractors.pdf

At risk of telling you something you already know but I would stress to your client while sending the new rules that the determination of who is an employee or independent contractor is (and always been) an objective determination.  It isn't always easy to make the determination but it is always been about objective tests.  It isn't something you get to decide or negotiate with the people who you do business with.  

I never make that determination or negotiate nor attempt to, not my place as I have no clue about the biz structure. I know about the 20 step rule and also know enough for pass/fail smell test and also enough to make noise about it. At the end of the day, it is between the sponsor and the CPA.

I can only either warn them about the dangers or not accept as a client. nothing else to do.

Hi Ernie

Thank you for the write up and the questions.

I am approaching this from both points.

Point 1 being, are they really IC? Not my place to determine. This is why we have attorneys to make that determination. The fact that they are on the website and indicated as managers, hmmm.

Point 2 being, if not IC than is it reasonable to pay them on 1099 basis and can the 1099 be used as a salary? My immediate reaction no but again not my place to make any comments.

In my opinion both points require an attorney's blessing and treated accordingly.

We agree they need an opinion from another authority.  From my experience, more than likely, they are employees (“if it looks like a rose, and smells like a rose…”).  I don’t see how paying them as 1099 would qualify for as compensation for Qualified Plan purposes.  However, a 1099 may be covered under a Non Qualified arrangement.

And it walks like a rose

If I may chime in: for the sales associates, there is a statutory contractor provision in the Internal Revenue Code that treats them as independent contractors. In all likelihood, Jane and Mary are common law employees of Joe's business and would have to participate in any qualified plans the business establishes. 

Thanks for chiming in with the additional information. 

I agree with the common law employee statement but what do you use for compensation if they are getting 1099s?

I don't believe you can use 1099 compensation for Qualified Plan purposes.  If they were "statutory employees" they would be receiving a W-2 and Box 13 would be checked.

Here is my legal opinion and my opinion as a real estate broker since 1974: 

Real estate agents are classified as independent contractors by Federal law.  See 26 USC 3508 at

https://www.law.cornell.edu/uscode/text/26/3508

and see https://www.nar.realtor/advocacy/nar-issue-brief-real-estate-professionals-classification-as-independent-contractors

I see no evidence that this code provision was changed by the new DoL FLS Rule that you can find at 

https://www.federalregister.gov/documents/2024/01/10/2024-00067/employee-or-independent-contractor-classification-under-the-fair-labor-standards-act

FMSINC

Thank you for all the links. I agree about the RE agent being ICs (with the proper credentials) but when your title is marketing manager, how is this a RE agent? Hmmm

But again, I do not know if they have the credentials as listed in the first link you provided so will dig in more.

Ernie, I agree 1099s cannot be salaries.

This is getting crazier by the minute but will have an attorney go nuts about it.

Thank you all for your input.

Jakyasar:  The statute defined "real estate agents" and "direct seller".  The people who work for a broker in any other capacity are almost certainly employees.  That would include the secretarial staff and a marketing manager who is not compensated as set forth in the statute. There are people who work for brokers that handle advertising and marketing materials like VistaPrint  

Booklets
Brochures
Business Cards
Forms
Checks
Door Hangers
Flyers
Gift Card Holders
Key Card Holders
Magnets
Table Tents
Packaging Insert Cards
Custom Postcards
Presentation Folders
Whose job is it to make decisions about the employment status of someone like this?  A Plan Sponsor is at risk if he/she makes the wrong choice.  "Employees" get 7.65% employer contributions to FICA and Medicare, the same health insurance and pension benefits as the other "employees", Worker's Comp coverage, sick leave and annual leave and all of the other fringe benefits.  Independent contractors get none of them.     

Realtors tell you that the R in their logo stands for "Republican".  That that may provide understanding of how section3508 came to  be enacted during the Presidency or Ronald Reagan.  

Great information, thank you for sharing.