An important reminder from NAR: The Internal Revenue Service ("IRS") requires that listing brokers who pay a cooperative commission in excess of $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.
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 course of the payor's trade or business to complete Box 7- Nonemployee 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. "Nonemployee 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 the course of their trade or business to nonemployees.
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.
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