Q: I received a referral from an agent in another part of the state to work with a buyer. I checked with the Division of Professional Licensure to be sure that she was licensed. Come to find out, she is an inactive salesperson. I thought that I could only pay referral fees to active brokers and salespersons. Also, because she is a salesperson and not a broker, I thought license law prohibited me from paying her directly.
A. You may pay the referral fee directly to the agent. Massachusetts General Law Chapter 112, Section 87XX ½ created an “inactive” license status for those who did not complete their continuing education requirements while also permitting inactive salespersons to receive referral fees. It states that an inactive salesperson may “assist with or direct the procuring of prospects and may receive referral fees for such procurement activities.” Aside from collecting a referral fee, the statute prohibits inactive licensees from engaging in the business of or acting as real estate brokers or licensees.
You are correct that salespersons with an active license can only receive compensation from the broker with whom they are affiliated. Inactive licensees, however, are precluded from affiliating with a broker due to their inactive status; so this is the only instance where a salesperson can receive a referral fee directly.
To determine a licensee’s status, visit: http://www.mass.gov/ocabr/licensee/dpl-boards/re/
Q. As a listing broker, am I required to fill out a 1099 when I pay a cooperating broker a commission or referral fee?
A. The Internal Revenue Service (“IRS”) requires listing brokers who pay “nonemployee compensation” of $600 or more to an individual who is not an employee 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. To access the 1099-MISC Form, with accompanying instructions, please visit: http://www.irs.gov/pub/irs-pdf/i1099msc.pdf
Q. What if the escrow agent disburses the cooperating agent’s fee at the closing? Does the Listing Broker still need to fill out a 1099?
A. Most likely, yes. The fact that the cooperating commission is being paid directly by the escrow agent does not negate the requirement to complete at 1099. 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.
Q. The IRS requirement only seems to apply when listing brokers pay cooperating commissions to individuals. What if the listing broker pays a brokerage that is a corporation?
A. This requirement only applies to payments made to individuals, and does not apply when the payments are made to corporations. It is recommended, however, that the taxpayer make it part of their risk management policy to obtain the W-9 from all cooperating brokers in order 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 verify the corporate status of the cooperating broker by checking the secretary of state’s website: http://www.sec.state.ma.us/
DISCLAIMER: The information above is provided as a general overview, and is not meant to provide specific legal advice. The MAR legal department advises all REALTORS to consult an accountant or tax attorney regarding potential tax consequences of paying and receiving cooperating commissions.