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Mortgage brokers, mortgage loan originators

roniswindell
Level 3

Do any of you have clients who are W2 mortgage brokers or mortgage loan originators who have been drastically affected by TCJA elimination of Employee Business Expenses in 2018 and 2019?  The extensive marketing expenses required for this job are not reimbursed by the employers, yet these clients are forced to be W2 employees by federal requirements.  I am looking for talk within the industry of the IRS allowing these types of employees to fit within the Statutory Employee definition.  There was case law on this subject before TCJA related to minimum tax, but I've found nothing applicable since. 

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hedgeslaw
Level 3

The Statutory Employee provisions in the Code have not changed as a result of TCJA, so loan originators still do not meet those definitions.

- There is such a thing as a misclassified W-2 worker. See BUTTS CASE [Butts v Commissioner, TC Memo 1993-478 affr 49 F.3d 713(11th Cir)]. Also see WICKUM CASE (Wesley C Wickum v Commr, T.C. Memo, 1998-270) and HATHAWAY CASE (Paul E Hathaway v Commr, T.C. Memo 1996-389). In these cases, the worker got a W-2 and was allowed an above-the-line deduction for their expenses. I presume only the expenses were listed on the Sch C and presume the W-2 was listed as usual on the Form 1040. As a side note, it is common and normal for "day-traders" to report their expenses (computers, internet etc) on Sch C and their income on Sch D - just an FYI to show how others report their business expenses above-the-line.

- An employer provided salary reduction plan that funds a spending account is one solution.

- Having the worker form an LLC or corporation and becoming its only employee, and having the entity contract with the entity for services would allow the worker to deduct their expenses through their entity and report their income as guaranteed payment for services-subject to SESS. However, look into the personal service corporation Code provisions.

- By the way, the Dept of Labor, in mid-November, 2020, issued new guidance related to employee vs. independent contractor. Under their provisions, howsoever the employer classifies the worker controls. I think this merely shifts the burden of proof to the worker to prove their status. And I am not sure how this affect the IRS's position.

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BobKamman
Level 13

Have they been drastically affected by TCJA, or have they been drastically affected by employers who refuse to put them on an accountable plan like normal businesses do?  

I doubt that it's individual borrowers who cause most of the marketing expenses.  It's the others in the real-estate food chain who are being bribed induced to send business their way.  

roniswindell
Level 3

No, it's more complicated than that.  They have been drastically affected by TCJA because their employers have barely come to terms with the fact that they must W-2 the work force who were previously independent contractors, much less develop accountable plans.  Accountable plans are not normal to this industry.  Everything settled down for awhile when Employee Business Expenses were still allowed, but the past two years it has been in an uproar.  

The marketing expenses are a result of the need for online leads, which is the only way to succeed at a high level in loan origination.  The savvy brokers have learned to fine tune those online skills, watch the results constantly, and change it up every few months.  They aggressively pursue the leads, and this is very expensive.  

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BobKamman
Level 13

Just another case of employers not valuing their employees.  Many sales jobs are like this -- if you earned a bonus because you met your quota last year, your quota is increased unrealistically this year. But in the long run, does this affect the number of mortgage loans made?  Or does it just affect the cost to borrowers, because of the slush funds needed to lead them away from competitors?  As more business moves online, the problem will eventually go away.  

qbteachmt
Level 15

While I would not hold my breath, I would not be surprised if a Congressional action returns "employee costs" to the tax returns as part of covid-19 coping costs for businesses.

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roniswindell
Level 3

This would be a good stop-gap measure, but I believe the industry needs a long-term solution.  Statutory Employee legislation would be an answer.  

I was wondering if any other practitioners had run across this problem.  

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hedgeslaw
Level 3

The Statutory Employee provisions in the Code have not changed as a result of TCJA, so loan originators still do not meet those definitions.

- There is such a thing as a misclassified W-2 worker. See BUTTS CASE [Butts v Commissioner, TC Memo 1993-478 affr 49 F.3d 713(11th Cir)]. Also see WICKUM CASE (Wesley C Wickum v Commr, T.C. Memo, 1998-270) and HATHAWAY CASE (Paul E Hathaway v Commr, T.C. Memo 1996-389). In these cases, the worker got a W-2 and was allowed an above-the-line deduction for their expenses. I presume only the expenses were listed on the Sch C and presume the W-2 was listed as usual on the Form 1040. As a side note, it is common and normal for "day-traders" to report their expenses (computers, internet etc) on Sch C and their income on Sch D - just an FYI to show how others report their business expenses above-the-line.

- An employer provided salary reduction plan that funds a spending account is one solution.

- Having the worker form an LLC or corporation and becoming its only employee, and having the entity contract with the entity for services would allow the worker to deduct their expenses through their entity and report their income as guaranteed payment for services-subject to SESS. However, look into the personal service corporation Code provisions.

- By the way, the Dept of Labor, in mid-November, 2020, issued new guidance related to employee vs. independent contractor. Under their provisions, howsoever the employer classifies the worker controls. I think this merely shifts the burden of proof to the worker to prove their status. And I am not sure how this affect the IRS's position.

If this solves your problem, be sure to mark it "SOLVED" to help other find the answer

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roniswindell
Level 3

Thank you for your response, it has given me a lot to think about.

Right, I would like to see the IRS change the Statutory Employee provisions to include loan originators.  Their contract classifies them as an "outside salesperson", and it is very close to the definition, but not quite.

The cases you referred to are included in the ones I have researched, but I was hoping for something more recent.  That information on day-traders is good to know.  I've never had one who didn't have other income besides day trading included on the Sch C, so it didn't look wrong.  

I will look in to that salary reduction plan to fund a spending account suggestion, thanks.

Doubtful that this particular employer would go for the LLC or corporation route for their employee, not sophisticated enough to follow that through, I fear.

Ironic that the Dept of Labor is coming down hard on the employee vs independent contractor definitions when another federal law has dictated that these must be employees or they will not allow them to participate in the federally-guaranteed loan market.

Thanks again, this was most helpful!