You probably pay your agents on 1099s and never think about it again. Usually that's right. Licensed real estate agents get a special rule most industries don't have. But that rule only protects you if three conditions hold, and one of them is a single sentence in a signed contract. Miss it, and you're back to the control test the IRS uses for salons and cleaning crews, the test a brokerage can lose if it sets office hours, assigns floor time, and requires its own forms and scripts.

The three conditions

Under §3508, a qualified real estate agent isn't your employee for federal tax purposes. That covers income tax withholding, Social Security, Medicare, and federal unemployment tax. Your agent qualifies only if all three are true:

1. They hold a real estate license. No license, no protection.
2. Substantially all of their pay for real estate work is tied to sales or other output, not hours. The IRS's proposed regulations put that line at 90% or more. Those regulations were never finalized, so treat 90% as a benchmark, not settled law.
3. They work under a written contract that says they will not be treated as employees for federal tax purposes. That's the sentence.

When all three hold, you never have to argue about control. When one fails, that agent goes back to the common-law control test.

Where brokerages slip

Your agreement says "independent contractor" but not the federal tax language. A commission split sheet usually doesn't say it, and neither does an onboarding packet nobody signed. Use the statute's own words instead of hoping a label is close enough.

You can't produce a signed copy. If the agreement was never countersigned, was signed months after the agent started, or sits in a former office manager's inbox, treat it as missing.

Some of the pay isn't commission. A monthly stipend, hourly pay for floor duty or admin work, or a team-lead salary can push a licensed agent below that 90% benchmark for the year. When that happens, the protection fails for that year.

Property management isn't covered. Under the proposed regulations, managing property doesn't count as real-estate-agent service. A licensed agent who manages rentals for your owners gets judged on that work under the control test, separately from their sales work.

Unlicensed staff never qualify. Transaction coordinators, showing assistants, marketing help, and office admins paid per file on a 1099 all fall under the control test. A coordinator who works set hours in your office, on your software, from your checklist, looks like an employee.

What it costs when it fails

Example only, not client data: You pay an unlicensed transaction coordinator $48,000 in 2026 on a 1099, and the IRS reclassifies her as an employee. If you filed the 1099 and didn't intentionally disregard the rules, §3509 sets the bill at reduced rates:

• Your share of Social Security and Medicare at 7.65%: $3,672.00
• Income tax withholding at 1.5% of wages: $720.00
• Employee share of Social Security and Medicare at 20% of the normal amount: $734.40
• Total: $5,126.40 for one worker for one year, before federal and state unemployment tax, penalties, and interest.

If you didn't file the 1099, the 1.5% becomes 3% and the 20% becomes 40%, bringing the total to $6,580.80, unless the failure was due to reasonable cause. If the IRS finds intentional disregard, the reduced rates don't apply at all. Multiply that by every open year and every coordinator.

A clean federal answer doesn't settle state unemployment or wage law either. Have that checked separately for each state you operate in.

What to do

1. Pull every agent agreement this week. Check that each one is signed, dated, and contains the federal tax sentence.
2. Re-sign anyone whose agreement is missing or weak before January 1st, with language that tracks §3508(b)(1)(C), so all of 2027 runs under a compliant contract. Have your attorney review the wording.
3. Run a pay-mix check on every licensed person. Divide output-based pay by total pay for real estate services for 2026. Anyone under 90%, the proposed-regulation benchmark, needs a pay-plan change or a common-law review.
4. Split property-management and admin pay out of your commission records. That work gets its own classification decision, in its own accounts.
5. Review every unlicensed person on a 1099. If they fail the control test, plan the move to payroll. If you're eligible, the Voluntary Classification Settlement Program lets you reclassify going forward by paying 10% of the §3509(a) amount for the most recent year, $512.64 in the example above, with no interest or penalties on that amount and no classification audit of those workers for prior years. You qualify only if you've treated the workers consistently as nonemployees, filed their 1099s for the previous three years, and aren't under an employment tax audit by the IRS or a classification audit by the Department of Labor or a state agency. File Form 8952 at least 120 days before the start date, so an April 1st, 2027 switch means filing by December 2nd, 2026.
6. File 2026 Forms 1099-NEC on time. The threshold is $2,000 for payments made in 2026, and the forms are due February 1st, 2027, because January 31st falls on a Sunday.

One more check while you're in the books: escrow and earnest-money deposits in your trust account aren't brokerage income. If your books run them through revenue, that's a second fix.

If you can't put your hands on a signed agreement for every agent, book a 30-minute Tax Leak Review. We'll go through your agreements, pay mix, and 1099 population, and you'll leave with a list of what to fix before January 1st.

Tristan D. Taylor, EA

​tristandtaylor.com​