A new year gives the opportunity for a fresh start and a New Year’s resolution. For CRE brokers, a good resolution is to reduce taxes and save more for retirement. One way to do this is to change your compensation method with your brokerage firm from W-2 to 1099.
Some CRE brokerage firms pay their brokers and sales agents as W-2 employees, especially early in their careers. Some will automatically graduate to 1099 compensation and others may need to request this change. Most should have the opportunity to receive their compensation via 1099 according to IRS guidelines for Qualified Real Estate Agents (QREA). Transitioning to the QREA method has pros and cons, but the pros typically far outweigh the cons.
For CRE brokers paid via 1099 (QREA), understanding the differences in compensation method present many opportunities for tax reduction and retirement savings. The first difference is the ability to now deduct business related expenses such as mileage, association dues, cell phone, etc. These were deductible to W-2 employees as a Miscellaneous Itemized Deduction on personal tax returns, but those deductions went away with tax reform in 2018.
As a 1099 employee, you will now be able to save more for retirement using an Individual 401(k). An employee contribution of $19,500 is allowed plus an employer contribution of 20% of net income from self-employment, for a maximum total of $58,000. A $6,500 catch up contribution is also available if age 50 or older. The Individual 401(k) provides for greater contribution potential and has lower income requirements than a SEP-IRA. Additionally, being paid via 1099 can help give you more favorable tax treatment for sign-on bonuses with a new company or retention bonuses with your current employer.
Some changes to note as a 1099 employee: you will have to pay for employee benefits like health insurance. Most brokerage firms allow you to have access to their health insurance plan, but you’ll have to pay the full cost. But since health insurance premiums are tax deductible, this new expense will offset some taxes. Other employee benefits like short-term or long-term disability and group life insurance typically are no longer available either.
1099 employees also pay Self Employment taxes, which are equal to both the employee and employer payroll tax. The employer payroll tax of 7.65% on income up to $142,800 will be a new, but also a deductible, expense. All these expenses are controllable to some extent and certain strategies can help to limit them.
Deciding to be paid via 1099 is only the beginning. Many more decisions and opportunities will arise under this new compensation model. We can help you evaluate your most favorable options and strategies.
