The risks of 1099 contractors in property management

Multifamily property managers and owner managers face countless challenges and complexities day in and out. From resident relations and legal compliance to property takeover, both established and new property management company executives can quickly become overwhelmed handling all the moving parts required to run the company. 

One of the most common challenges, particularly when taking over a property, is hiring and retaining full-time staff. 

Staffing challenges have only gotten more pronounced in recent years due to various economic and social shifts. Because of these staffing difficulties, some property managers are tempted to turn to 1099 contractors to fill critical roles like leasing agents or maintenance staff. 

Unfortunately, many property management companies and owners are unaware of the rules regarding hiring 1099 contractors.

It is imperative that anyone who manages multifamily properties understands what the dangers and implications are if you “hire” a 1099 contractor, even temporarily, that is acting as an employee. 

In this article, we will dive into why hiring a 1099 contactor in place of property staff can put your company at risk, ways to prevent potential staffing problems and appropriate alternatives.

Understanding 1099 contractors

You may have heard people use the term 1099 employee before. Although this term is commonly used, there is actually no such thing as a 1099 employee. A more accurate term would be a 1099 contractor otherwise known as an independent contractor. 

Independent contractors are individuals who are self-employed. Some examples of independent contractors include doctors, lawyers, contractors, sub-contractors and free lancers. 

While it is common for companies to retain independent contractors, there are specific roles and industries where it does not properly translate. It is not a one size fits all situation. Specifically, for roles like a leasing agent or on-site maintenance staff.

Misclassifying an employee

The first and largest issue companies are often unaware of when hiring an independent contractor for these roles is they are misclassifying an employee. 

When classifying someone as a contractor, there are specific legal guidelines that need to be followed carefully. The Internal Revenue Service (IRS) uses a 20-factor test to determine worker classification, with factors like control over the work, tools and equipment provided and training all playing a role. 

According to the IRS, “You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action… If an employer-employee relationship exists (regardless of what the relationship is called), then you are not an independent contractor.” 

In other words, if you hire someone as a leasing agent or on-site maintenance staff and require them to work specific hours and perform specific tasks, they are an employee not an independent contractor. Misclassifying an employee as a 1099 contractor can lead to hefty fines, back taxes and potential lawsuits.

Workers compensation

Another issue comes in the form of workers compensation. Despite best practices, employees getting hurt on property is not inevitable. If you are misclassifying an employee as a 1099 contractor and they get hurt, you could be held liable and open to lawsuits.

The bottom line is that 1099 contactors are not a replacement for full time property staff and can lead to many legal problems for you and your company.  

What should I do instead?

The best defense against staffing shortages is to be proactive before the issue arises. We all know staffing can be difficult for any management company, but we have found those who struggle the most are new management companies taking over management for the first time. This often happens because they take over properties before they are prepared. 

When you take over a property, we recommend coming in prepared with offer letters for the existing employees who you want to keep on board. Always allow yourself enough time, generally four weeks, to set up employee benefits and payroll. 

If you follow these guidelines and still find your company short staffed, we recommend finding a reputable temp agency, until you can retain full- or part- time employees.

The bottom line

Even with all of its complexities, property management can be a rewarding endeavor if you do things the right way. While many consider cutting corners when their plate is full, staffing and employees is not a matter to be taken lightly. The repercussions of contractor-employee misclassification is not worth the cost. 

If you need clarification or guidance, we recommend consulting with a tax professional to ensure you are compliant with IRS guidelines.

Amy Williams is a Partner at Ascent Multifamily Accounting. Riley Driggs is the Marketing Manager at Ascent Multifamily Accounting.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

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