Understanding Your Compensation As A Real Estate Professional… or what I call the “Trust but verify method”

The #1 thing that I believe is important to understand is the broker fees & deductions.

Ok, ok, ok… don’t discount me as a dummy quite yet. 

This may seem super obvious but follow my logic here.

I follow the “trust but verify” philosophy especially when it comes to professionals that are paid on a commission basis. 

As a realtor, you should understand each and every item that gets deducted from each deal you close.

Some brokerages assess, in addition to your broker fees, technology, desk fees, marketing fees, etc.

So, I highly recommend that every transaction you close, you should request a reconciliation from your broker to show what the total commission payout and total deductions taken were for that transaction.

This is ultimately most important to understand to “true up” your year end 1099.

Let’s say for example you close a deal for a client and your total commission is $10,000 (let’s keep the numbers simple).

After you celebrate your success with your newly minted homeowner, you request a reconciliation from your broker and discover the following deductions:

$1,000 brokers fee

$250 marketing fee

$150 desk/technology fee

$185 MLS fee

So total deductions for that transaction are: $1,585 leaving you with a net deposit to your bank account of $8415.

Let’s say that happens once a month (for simplicities sake keeping the numbers simple) for a total gross production of this for the year broken down by month:

The income from which you deduct other things (home office, milage, phone, etc) is $100,980.

Why is this all so critical to track?

Let’s say the broker issues the 1099 to you at the end of the year and shows total income of $120,000.

Well, you have been able to reconcile that amount and know that they are issuing you the 1099 on the TOTAL production before any fees that they deduct and that way you can capture those write offs.

Or, if it’s the opposite and the 1099 reflects the $100,980 figure.

Now you can confidently know that you are not double dipping by erroneously deducting things that were already accounted for in the brokers reporting.

The key to the “trust but verify” process is knowing your numbers and investing a small amount of time during the year to fully understand what your numbers look like and where you are tracking for the year.

And, in the off chance that your broker makes an error in the commission calculation, you can catch that earlier and avoid any headaches down the road to try to correct a mistake that is months old.

Good tax strategy starts with knowing your numbers and this is particularly true when it comes to understanding how things are deducted from your income as a commission agent.