In Illinois, all real estate agents must be licensed under a sponsoring broker. That sponsoring broker, either an individual or a company, is the only entity that can directly receive income, whether fees or commissions, from the public for conducting real estate transactions. Agents are compensated for income producing activities by their broker.
While an agent may be an employee of the broker, most agents in Illinois work as independent contractors and are paid by commission. This requires, by License Law, an independent contractor agreement between the agent and broker specifying what each will provide to the other and under what terms. Such an agreement provides some tax benefits to both, although probably more to the broker, and allows somewhat more freedom to the agent than would an employment agreement. As an independent contractor the agent is responsible for his/her own taxes and social security liability and nothing is withheld from the commission payments.
There are several models for broker/agent compensation plans, but the most common is some sort of commission split schedule. In some plans, the agent may have a monthly fee payable (desk fee) to the office in return for a set commission split on all agent generated business. Most of the franchise companies (Prudential, Century 21, Coldwell Banker, ERA, etc.) use graduated commission schedules where the agent's split is based on the agent's level of production, although some may also offer desk fee arrangements.
The majority of brokers are members of a Multiple Listing Service through which they offer to share earned commission with other broker members who cooperate in the sale. Most transactions have two sides with a listing broker and selling broker, as well as agents working under each. If an agent is on the listing side (on a 50/50 split agreement) and another agent brings in an acceptable offer, the earned commission would be split four ways:
Sale: $300,000
Agreed Commission: 5%
Amount: $15,000
50% to Selling Broker: $7,500. (split with Selling Agent)
Amount to Listing Broker: $7,500.
50/50 Split: $3,750 to Listing Agent
Typically, as the agent production increases, perhaps on an annual basis, his/her split will advance. While it is common to see productive agents on 70% or more splits, it's important to remember that the sponsoring company needs operating capital and some profit to continue in business. On a commission split program the sponsoring broker will usually bear the cost of rent, secretaries, phones and utilities, company advertising, maintenance, and office equipment to allow the agent to do business with only minimal out of pocket expense. Agent expenses will include things like Realtor® Association fees, local board dues, MLS fees, automobile expense, insurance (usually including a professional liability policy: Errors and Omissions), and individual business promotion expenses.
