Hiring Employees vs Independent Contractors: Here's What to Know
Private communities must hire vendors to perform services such as snow removal, street repair, mowing, and tree trimming—a task that is often delegated to a homeowners association management company.
In an established association community, a maintenance fund is set aside to pay for these and other HOA services, but money isn't the only important thing. It's also essential to hire the right vendor.
Proper vendor selection may affect more than the quality of services a community receives; it may also affect the finances of the community regarding the employment status of vendors.
What Is an Employee?
The first decision in hiring a vendor is to decide whether to hire an employee of the community or an independent contractor. Publication 15-A of the Internal Revenue Service states that a vendor is considered an employee of the community if the HOA “can control what will be done and how it will be done.”
If the association controls the work the vendor performs and how the vendor performs it, the vendor is considered an employee. This means the community must pay unemployment tax on the vendor's earnings, verify the vendor’s legal residency status, and withhold income taxes, social security taxes, and medical taxes from the vendor's earnings.
Depending on the number of vendors a community needs, hiring them as employees could be costly concerning payroll taxes and administrative costs, hence the decision of many communities to hire independent contractors through a homeowners association management company.
What Is an Independent Contractor?
According to publication 15-A of the Internal Revenue Service, a vendor is considered an independent contractor if the community controls or directs “the result of the work” done by the vendor but not the “means and methods of accomplishing the work.” Below are some examples of association service projects that meet this definition:
- The board instructs a landscaper to cut grass but not how to cut it
- The board directs a painter to paint a wall but does not supervise the work
- The board tells an attorney to file a suit but not how to advance the case
Which Option Is Best for Your Association?
The difference between an employee and an independent contractor pertains to how the association approaches the work of a vendor. While there is certainly value in actively supervising the work, is it worth incurring payroll taxes and administrative costs that are avoided when an independent contractor is used? Many boards and providers of association services say no. When an independent contractor is used, the community only has to file and supply the vendor with a 1099 Payment Evidence Form—two minor administrative duties that cost almost nothing.
Regardless of whether an association uses an employee or an independent contractor, the terms of the vendor agreement should be stated in a contract that lists the following:
- the work the vendor will perform
- when the work will be commenced and completed
- the cost of the work
- the method of payment for the work
- how to address a failure to perform the work
- the indemnification of the vendor for damages caused by the vendor while performing the work,
- how to terminate the contract.
It's important to note that your community association management company can prepare the contract.
The decision to hire employees or independent contractors for your association should be carefully considered. Employees provide control, consistency, and community-building potential, while contractors offer flexibility and cost-effectiveness.
Consider factors like the nature of the work, budget, and desired level of control. Seek legal advice and comply with labor laws. Striking the right balance will maximize efficiency and support the board's goals for long-term success.