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Most Texas brokerages have an independent contractor agreement somewhere. It’s usually in a shared folder, it was usually written by the broker before last, and at least one agent who joined in the spring never quite got around to signing it.
That’s a bigger deal than it sounds. For real estate agents, the signed real estate agent contractor agreement isn’t just good paperwork. It’s one of three things the IRS needs to see before it treats your agents as self-employed instead of as your employees, with payroll taxes and withholding to match.
This is part two of our employee vs. contractor series.
In part one, we looked at booth renters vs. employees in Texas salons, where the answer comes down to who controls the work. Real estate gets its own rule, and it works a little differently.
It starts with a phrase most brokers have never heard.
Federal tax law has a special category for licensed real estate agents. The IRS calls them statutory nonemployees, and it says they are “treated as self-employed for all federal tax purposes, including income and employment taxes” when the conditions are met.
The rule itself sits in section 3508 of the tax code, and it’s short. The agent has to be a licensed real estate agent. Substantially all of their pay has to be “directly related to sales or other output” rather than to the number of hours worked. And the work has to be done under a written contract that says the agent “will not be treated as an employee” for federal tax purposes.
When all three line up, the agent isn’t your employee for federal tax, and you aren’t their employer. That’s a cleaner answer than most industries get. A salon or an HVAC shop has to work through the IRS common-law test, which weighs a long list of facts about control. A brokerage that meets section 3508 gets to skip that argument.
The catch is that all three legs have to hold at the same time, and the written agreement is the one brokers lose track of most often. So it’s worth knowing what that agreement actually has to say.
For federal tax purposes, the agreement has one job it can’t skip: it has to say, in writing, that the agent will not be treated as an employee for federal tax purposes. Section 3508 asks for a written contract between the agent and the brokerage that includes that statement. An agreement that talks about splits and office hours but never says it is missing the part the IRS cares about.
Beyond that, the agreement should match how you actually pay people. Since the second condition is about pay tied to sales, it should make obvious that agents earn by closing deals, not by the hour.
A few other things belong in it, too:
We look at these agreements for the tax and bookkeeping side, and a real estate attorney should handle the legal drafting.
Then there’s the Texas side, which is where brokers start to worry.
Texas brokers have real supervision duties, and that’s fine for federal tax. Under the Texas Real Estate Commission’s broker responsibility rule, a broker has to notify each sponsored agent “in writing of the scope of the sales agent’s authorized activities” and keep current written policies and procedures for things like advertising, trust money, and records.
That’s a lot of control for someone you call a contractor, and TREC saw that coming. The same rule says it “is not meant to create or require an employer/employee relationship between a broker and a sponsored sales agent.” And because section 3508 looks at licensing, pay, and the written contract, the supervision TREC requires doesn’t, by itself, knock your agents out of statutory nonemployee status.
The TREC rule also gives you more paperwork to keep in order. Any license holder who leads or manages a team “must be delegated as a supervisor,” and that delegation has to be in writing. Brokers also have to keep records, including “sponsorship agreements between the broker and sponsored sales agents,” for at least four years after a transaction ends, per the same TREC rules. Your contractor agreement and your sponsorship paperwork belong in the same drawer.
What actually gets brokers in trouble is somewhere else.
Required sales meetings, a dress code, and a shared office schedule usually aren’t the problem for federal tax. The trouble starts when one of the three section 3508 legs quietly gives way.
The first is pay. Once someone is paid for their time instead of their closings, like a weekly stipend for floor duty or a salaried showing agent, the “directly related to sales or other output” leg gets shaky. The second is the signature. An agent who has been closing deals for six months without a signed agreement doesn’t have the written contract section 3508 asks for. The third is the license. Your assistants, transaction coordinators, and marketing staff aren’t licensed agents, so section 3508 doesn’t cover them at all, and the regular common-law test decides how they’re treated. Get that one wrong and the IRS says you “may be held liable for employment taxes” for that worker, under its worker classification guidance.
Let’s look at an example. A Fort Worth brokerage has 15 agents, all on commission, all on the same contractor agreement. Two newer agents get a flat weekly payment to staff the office on Saturdays, one agent who transferred in from Dallas never signed, and the broker’s assistant has been paid as a contractor for three years. On paper, the brokerage is “all 1099.” In practice, three people may not fit the rule. The fix wasn’t dramatic: get the missing signature, tie the Saturday pay to leads or closings or move it through payroll, and put the assistant on payroll.
One more thing to keep in mind. Section 3508 applies “for purposes of this title,” meaning federal tax. Texas state agencies apply their own rules, so ask us before you assume the federal answer covers everything.
Once the agreements are right, the books have to match them.
If your agents are statutory nonemployees, you report what you pay them on Form 1099-NEC, not a W-2. For payments made in 2026, the threshold is $2,000, up from the $600 many brokers still remember, per the IRS 1099 instructions. The same instructions say to include “fees, commissions, prizes and awards for services performed as a nonemployee,” and the form is due to the IRS on or before January 31.
Where it gets messy is the net-out. Commissions come in, the split goes out, and desk fees, transaction fees, and E&O charges come off along the way. How you record those decides the number on each agent’s 1099, so decide it on purpose and apply it the same way for every agent.
TREC adds its own layer. Under its rules, compensation to a sponsored agent has to be “paid by, through, or with the written consent of the sponsoring broker,” and receipts and disbursements of compensation are part of the records you keep for four years. That’s a good reason to track commission income by transaction instead of in one big bucket.
Our real estate accounting team sets the books up this way so January doesn’t turn into a scavenger hunt. Agents have their own side of the ledger to keep up with, too.
If you’re the agent, being a statutory nonemployee means nobody is withholding anything for you. You pay self-employment tax, which the IRS sets at 15.3% for Social Security and Medicare combined, on most of your net earnings, though you can deduct the employer-equivalent half when you figure your adjusted gross income.
You’ll also likely owe quarterly estimates. The IRS says individuals generally have to make estimated tax payments if they expect to owe $1,000 or more when they file, which describes most agents in a decent year. Commission income doesn’t arrive on a schedule, so your estimates shouldn’t be a flat guess.
The rest is expense tracking. MLS and board dues, mileage, marketing, signs, continuing education, and a qualifying home office are the usual list, and they hold up best when you log them through the year instead of in April.
Our real estate tax guide for 2026 covers the bigger property questions, and if your income keeps climbing, the S-Corp tax calculator is a quick way to see whether an S-corp election might be worth a closer look, depending on your situation. Which brings us to the agreement itself.
The best time is before your next agent signs, and the second-best time is before year-end, while there’s still time to fix things before 1099s go out in January.
It’s also worth a look any time your pay structure changes. A new team, a floor-duty stipend, a salaried role, or a merger with another brokerage all change the facts the agreement was written for.
When we review one, we check that the section 3508 language is there, that the pay terms match how money actually moves, that unlicensed staff are handled separately, and that the books and 1099s line up. We’ll also tell you when something needs an attorney instead.
If you missed part one, our post on booth renter or employee for Texas salon owners shows how the same question plays out without a special rule.
Want a second set of eyes on your agent agreements before 1099 season?
Get in touch with our team and we’ll walk through it together.
