Actual property brokerages mull keep away from Seattle’s new tax on excessive earners

As Seattle prepares to impose a new payroll tax on high salaries in large corporations, questions in the real estate industry are swirling about exactly how the tax will be implemented. And at least one idea came up to avoid the charge.

After the pandemic erupted last year, turning the local economy upside down and blowing a hole in the city’s budget, Seattle city council passed what is known as the JumpStart tax.

The tax would be levied on companies with $ 7 million or more in salaries based on Seattle employees earning $ 150,000 or more. Tax rates vary between 0.7% and 2.4%, with the highest tax rate directed to the largest companies like Amazon.

If the tax survives an ongoing lawsuit by the Seattle Metropolitan Chamber of Commerce, it will go into effect in January, with proceeds being used to fund affordable housing and other city programs.

A King County judge upheld the tax on Friday, despite the Chamber’s appeal.

The tax is based not only on the salaries of traditional workers, but also on payments to independent contractors.

With most real estate agents, brokers are independent contractors who share their commissions at different levels with the brokerage firm. Brokers pass the commissions on to the agents.

At Windermere, the state’s largest real estate agent, Co-President OB Jacobi argues he can pass the tax on to his agents.

For most Windermere agents, the company divides the commissions 50/50 with the agents until the agent pays $ 31,000 a year, Jacobi said. Then agents keep the full commission. Without the commissions passed on to the agents, its six Windermere offices in Seattle with about 300 agents would not reach the $ 7 million salary threshold, Jacobi said.

“I don’t get the income,” said Jacobi. “It’s crazy to say that you can tax someone for something they don’t get, period. End of the story.”

Seattle Act prohibits a company from “making any deductions from employee compensation in order to pay this tax.”

However, brokers can avoid the tax if each agent forms their own LLC or S Corporation. In this constellation, “a brokerage firm would not include payments to these companies in their payroll because they are not payments to employees,” the city’s Ministry of Finance and Administrative Services said in a statement. Any agent would have to hit the $ 7 million mark to be affected.

Jacobi said he feels “compelled to tell our people they are forming LLCs” under the proposed tax. But he’s unlikely to require agents to form separate business units, he said.

“My goal is to educate brokers about the pros and cons. That’s really all we’re going to do, ”he said. “I don’t want to force them to make a decision about a payroll tax. I think that’s kind of silly. “

Overall, the city estimates that the tax will affect about 1% of Seattle businesses. The tax rate varies depending on the size of the company and the salary level. For example, a company with $ 7 million or more but less than $ 1 billion would pay 0.7% of salaries between $ 150,000 and $ 399,999 per year, and a higher rate for salaries above $ 400,000 per year. For 100 people making $ 200,000, that would equate to a tax of $ 140,000.

For some agents, the tax raises questions about how their industry should join the city’s efforts to tackle housing affordability and homelessness. House prices across the Seattle area have hit record highs. About 12,000 people are homeless in King County.

In the long term, the income tax revenue will be used for low-income housing, rental subsidies, Green New Deal projects and other city programs, according to a high-level spending plan approved by the council. Part of the tax revenue will also be used to replenish emergency spending during the pandemic.

Coldwell Banker Bain’s agent Roy Powell said he hadn’t heard much about the details of payroll tax, but “anyone who isn’t making $ 150,000 needs so much help right now,” he said. “Just pay the damn tax.”

Sol Villarreal, a Windermere agent who backed the tax, said he supported Jacobi’s request to allow brokerage firms to pass the tax on to agents making more than $ 150,000. If this is not possible, Villarreal fears that brokerage firms could raise fees for all agents, even those who do not make the best of dollars.

“Those who are at the forefront of the game … we are making a lot of money right now selling houses that are becoming increasingly unaffordable for most Seattle residents,” said Villarreal. “I think it is our duty to do something. It also makes sense that all measures we have should be aimed at those of us who are well. ”

(Jacobi said he hadn’t thought about increasing the fees yet.)

Windermere agent Kristin Munger said she is skeptical of the city’s efforts to reduce homelessness and prefers to donate directly to nonprofits that advocate homelessness.

“I make a lot of money so it’s not about ‘oh, poor me’. More than that, is this the right way to solve this huge problem we have? ”She said.

At the same time, forming an LLC would add time and expense to agents already operating in a competitive market, she said.

“I work seven days a week right now,” said Munger. “It’s the hardest thing in 16 years to get a house buyer under contract.”

Russell Hokanson, CEO of the Seattle King County Association of Realtors, said he was focused on clarifying “how brokers can comply with the tax as it stands”.

LLCs are “already a structure in the industry for a variety of reasons,” he said. “The Seattle regulation could be another factor brokers are considering.”

Hokanson said the group has asked the city to clarify several other tax-related issues, including calculating where brokers do their jobs. Hokanson estimates 10 to 20 real estate agents would be affected by the tax.

Regarding passing the tax on to real estate agents, the Department of Finance and Administrative Services said the law “does not give FAS the discretion to allow taxpayers, including real estate agents, to pass this tax on to their employees”. That means the city council will likely have to accept such a change.

The average real estate agent in the Seattle area makes about $ 71,000 and the average realtor about $ 82,000 for 2020, according to data from the U.S. Bureau of Labor Statistics. Other surveys put the number higher: Indeed estimates an average salary of just under $ 100,000 and ZipRecruiter at around $ 87,000.

Several other local brokerage firms declined to provide anyone to discuss the tax, including Redfin where many agents are classified as employees. Redfin says his agents have earned an average of $ 112,200 in income over the past year, including bonuses and stocks.

At Coldwell Banker Bain, Executive Vice President of Operations John Deely estimates that about a quarter of the company’s agents in Seattle make $ 150,000 or more.

Deely said he had heard of the idea of ​​agents forming separate LLCs and plans to look into it, although he’s not sure if it is feasible.

“We’re not actively looking for ways not to pay the tax. We’re trying to interpret the tax and see how it will affect our business, ”he said.

Even if the tax falls due as currently envisaged, “we have no plans to leave town,” Deely said.