Tax Rules for Hiring Resident Property Managers
Find out special tax rules that apply when you hire a resident manager of your rental property.
Landlords who don’t want to do all the work themselves often hire a resident manager (also called an apartment manager) to handle the day-to-day details of running an apartment building, such as dealing with repairs, showing and renting vacant units, and collecting rent. As the name implies, a resident manager lives at the rental property. In some states and cities—California, for example—resident managers are required if an apartment building exceeds a certain size (16 or more units in California; nine or more units in New York City).
You should have a resident manager sign an employment agreement spelling out his or her duties and pay. Detailed guidance on how to hire a resident manager, including a sample employment agreement, can be found in Every Landlord’s Legal Guide, by Marcia Stewart, Ralph Warner, and Janet Portman (Nolo).
Resident managers (also called apartment managers) are employees of the landlords who hire them. This is so, whether they are paid a regular salary or are compensated wholly or partly with reduced rent. Not a single court decision or IRS ruling has ever held otherwise. (PLR 8128117.) All of the tax rules for hiring employees apply to resident managers, but there are a couple of special rules you need to know about.
No Payroll Taxes for a Resident Manager's Free Lodging
If you pay a resident manager a regular salary, you must pay and withhold federal payroll taxes, which consist of Social Security and Medicare taxes, unemployment taxes, and federal income taxes. Employees pay one-half of their Social Security and Medicare taxes through payroll deductions; the employer must pony up the other half and send the entire payment to the IRS. These taxes consist of a 12.4% Social Security tax up to an annual wage limit; in 2014, the limit was $117,000. Medicare taxes are levied on all employee wages at a 2.9% rate. This combines to a total 15.3% tax employee wages up to the Social Security tax ceiling.
However, you need not pay or withhold any federal payroll taxes on the value of free lodging you provide a resident manager for a rental property if:
- the lodging is at your rental property—that is, the manager lives in a unit at your rental building
- the lodging is furnished for your convenience, and
- you require the manager to live there as a condition of employment—in other words, the manager has no choice in the matter. (I.R.C. § 119.)
It is not difficult for any landlord who hires a resident manager to satisfy these requirements.
Under the rules, you furnish lodging for your convenience if you do it for a substantial business reason, other than providing the employee with additional pay. Obviously, landlords have a substantial business reason to have someone living at their rental property—they need a person there 24 hours a day to take care of tenants, maintenance, and security. Moreover, as mentioned above, resident managers are required by law in some states.
The condition of employment test is met if you require the employee to accept the lodging because they need to live at your rental property to properly perform their duties. The very nature of resident managers’ duties require that they live at the rental property. It’s a good idea to have a written employment agreement with a resident manager, including a clause requiring the manager to live at your rental property. This clause can simply say: “In order to properly accomplish the duties of Resident Manager, Employee is required to live at Employer’s rental property at [address] as a condition of employment.”
Example: Anne owns a triplex. She rents two of the units to regular tenants, but she gives John, the tenant of the third unit, an $800 per month reduction in rent in return for his working as her resident manager. John takes care of repairs, maintenance, and gardening for the building. Although John is Anne’s employee, she need not withhold or pay any payroll taxes on the $800 in free monthly rent she pays John.
Learn more about the Top Ten Tax Deductions for Landords.
Taxes When You Hire a Property Management Company
Instead of, or in addition to, hiring a resident manager, some landlords hire property management companies to manage their rentals. Such companies are often used by owners of large apartment complexes or absentee landlords who live far away from their rental property. Typically, you sign a contract spelling out the management company’s duties and fees. Such companies normally charge a fixed percentage—typically 5% to 10%—of the rent collected. Such fees are a deductible rental expense. Schedule E (the tax form you use to report income and expenses, assuming you file IRS Form 1040 to pay your taxes) contains a line where management company fees are deducted.
A management company is an independent contractor, not your employee. The people who work for the company are its employees or independent contractors—you are not responsible for their payroll taxes.