Real estate brokers reflect on how to avoid Seattle’s new high income tax

As Seattle prepares to levy a new tax on high corporate payrolls, questions swirl in the real estate industry about exactly how the tax will be implemented. And at least one idea has surfaced to avoid accusation.

After the pandemic struck last year, wreaking havoc on the local economy and squeezing the city’s budget, Seattle city council passed what’s known as the JumpStart tax.

The tax would be collected from companies with payrolls of at least $ 7 million based on Seattle employees earning $ 150,000 or more. Tax rates range from 0.7% to 2.4%, with the highest tax rate directed at larger companies, like Amazon.

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

A King County judge upheld the tax on Friday, although the chamber may appeal.

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

In most real estate brokerages, the agents are independent contractors who share their commissions with the brokerage at different levels. Brokerages transfer commissions to agents.

At Windermere, the state’s largest residential brokerage house, co-chair OB Jacobi says he should be able to pass the tax on to his agents.

For most Windermere agents, the company shares 50/50 commissions with agents until the agent pays $ 31,000 per year, Jacobi said. Then the agents keep the full commission. Without the commissions passed to agents, Jacobi said, his six Windermere Seattle offices with about 300 agents would not meet the $ 7 million payroll threshold.

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

Seattle law prohibits a company from making “deductions from employee compensation to pay this tax.”

Brokerages can circumvent the tax, however, if the agents each form their own LLC or S. In this configuration, “a brokerage would not include payments to these entities in its salary expense, because they are not payments. to employees, “the city’s Department of Finance and Administrative Services said in a statement. Each agent would have to hit the $ 7 million threshold to be hit.

Jacobi said that under the tax as it was designed, he feels “obligated to tell our people to go and set up LLCs.” But it is unlikely to force agents to form separate business entities, he said.

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

In total, the tax will affect about 1% of businesses in Seattle, according to the city’s estimates. The tax rate will vary depending on the size of the business and salary levels. For example, a company with a payroll of at least $ 7 million but less than $ 1 billion would pay 0.7% on salaries between $ 150,000 and $ 399,999 per year and a higher rate on those over $ 150,000. $ 400,000 per year. With 100 people earning $ 200,000, that would equate to a tax of $ 140,000.

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

In the long run, payroll tax revenues will be used for social housing, rent assistance, Green New Deal projects and other city programs, according to a high level spending plan the board approved. Part of the tax revenue will also be used to meet emergency spending during the pandemic.

Coldwell Banker Bain agent Roy Powell said he hadn’t heard much about the details of the payroll tax, but “anyone who doesn’t make $ 150,000 needs that much. is helping right now, ”he said. “Just pay the goddamn tax.” “

Sol Villarreal, a Windermere agent who supported the tax, said he supported Jacobi’s call to allow brokerages to pass the tax on to agents earning more than $ 150,000. If they can’t, Villarreal is concerned that brokerages will increase the fees for all agents, even those who don’t hit the jackpot.

“Those at the top of the game… we’re making a lot of money right now selling homes that are becoming increasingly unaffordable for most Seattleers,” Villarreal said. “I think it’s incumbent on us to do something. It also makes sense for any metrics we need to steer towards those of us who are successful. ”

(Jacobi said he hasn’t considered raising the fees yet.)

Windermere agent Kristin Munger said she was skeptical of the city’s efforts to reduce homelessness and preferred to donate directly to nonprofits working to tackle the homelessness problem. -abrism.

“I’m making a lot of money, so it’s not about ‘Oh, poor me.’ It’s more: is this the right way to solve this huge problem that we have? ” she said.

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

“I’m working seven days a week right now,” Munger said. “It’s the hardest thing in 16 years to have a buyer under contract for a home.

Russell Hokanson, CEO of the Seattle King County Association of Realtors, said he was focusing on clarifying “how brokerages can comply with the tax as it is currently written.”

LLCs are “already a structure that exists in the industry for various reasons,” he said. “The Seattle ordinance could be another factor that brokers consider.”

Hokanson said the group has asked the city for clarification on several other tax-related issues, including how to calculate where brokers do their work. Hokanson estimates that 10 to 20 residential brokerage houses would be affected by the tax.

As for the tax pass-through on real estate agents, the Ministry of Finance and Administrative Services said the law “does not give the FAS the discretion to allow taxpayers, including real estate brokerage firms, to pass on this tax on their employees “. This means that city council would probably have to accept such a change.

The average Seattle-area real estate agent earns about $ 71,000 and the average broker about $ 82,000, according to 2020 data from the US Bureau of Labor Statistics. Other surveys put the figure higher: Indeed estimates an average salary of just under $ 100,000 and ZipRecruiter approximately $ 87,000.

Several other local brokerages have refused to make anyone available to discuss the tax, including Redfin, where many agents are classified as employees. Redfin says nationally that its agents made a median income of $ 112,200 last year, including bonuses and actions.

At Coldwell Banker Bain, executive vice president of operations John Deely estimates that about a quarter of the company’s agents in Seattle earn $ 150,000 or more.

Deely said he has heard of the idea of ​​agents creating separate LLCs and plans to study it, although he’s not sure it’s feasible.

“We are not actively looking for ways not to pay the tax. We’re trying to interpret what the tax is and see how it’s going to impact our business, ”he said.

Even though the tax is due as it is currently conceived, “we have no intention of leaving town,” Deely said.

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