Homeowner 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 HOA community, a maintenance fund is set aside to pay for these and other HOA services, but as important as having money for the services is hiring the right vendors to perform services. 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.
Employees vs Vendors
The first decision in hiring a vendor is to decide whether to hire an employee of the community or an independent contractor (Vendor). 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 HOA 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 earnings of the vendor, verify the vendor’s legal residency status, and withhold income taxes, Social Security taxes, and Medical taxes from the earnings of the vendor.
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 (vendors) through a homeowners association management company. 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 HOA service projects that meet this definition:
- The HOA instructs a landscaper to cut grass, but not how to cut it
- The HOA directs a painter to paint a wall, but does not supervise the work
- The HOA tells an attorney to file a suit, but not how to advance the case
The difference between an “employee” and an “independent contractor” pertains to how the HOA 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 HOA boards and providers of HOA 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 HOA uses an employee or an independent contractor, the terms of the vendor agreement should be stated in a contract that lists 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, and how to terminate the contract.