Hiring Employees vs Independent Contractors: Here's What to Know

Community associations regularly hire vendors for services like landscaping, maintenance, and repairs. Whether this responsibility is handled by the board or a community association management company, selecting the right vendors and classifying them properly is critical for financial, legal, and operational success.

Understanding the Vendor Classification Decision

One of the first decisions an HOA must make is whether to classify a vendor as an employee or an independent contractor. This decision has tax implications, administrative requirements, and long-term budget considerations.

What Defines an Employee?

According to IRS guidelines (Publication 15-A), a vendor is considered an employee when the association has control over both what work is done and how it is done. This classification triggers requirements such as:

• Withholding income, Social Security, and Medicare taxes
• Verifying employment eligibility
• Paying unemployment tax
• Managing payroll reporting

Hiring vendors as employees may lead to greater control and consistency but increases the administrative and financial burden on the association.

What Defines an Independent Contractor?

A vendor is typically considered an independent contractor when the association controls only the outcome of the work, not the methods or processes used to achieve it. In this arrangement, the HOA is generally not responsible for employment taxes and reporting. Instead, the association provides a 1099 form for tax purposes.

This approach can reduce liability and administrative costs while allowing the board to focus on broader community oversight.

Determining the Right Fit for Your Community

Choosing between employees and contractors depends on several factors:

• Desired level of control over the work
• Budget and resource availability
• Complexity and frequency of services
• Risk management and legal compliance

Many associations prefer independent contractors due to cost savings and operational simplicity, especially when services are short-term, project-based, or specialized.

Key Considerations for Vendor Agreements

Regardless of classification, every vendor relationship should be governed by a formal contract that clearly outlines:

• Scope of work
• Project timelines
• Total cost and payment terms
• Performance expectations and remedies for non-compliance
• Indemnification and liability clauses
• Termination terms

An experienced association management company can assist in drafting and reviewing vendor contracts to ensure legal compliance and clarity.

Final Thoughts

Whether your HOA hires employees or independent contractors, the decision must be based on legal guidelines, community needs, and financial considerations. Employees may provide greater oversight and community integration, while independent contractors offer flexibility and reduced cost.

Boards should consult legal or tax professionals as needed and partner with a management company that understands how to structure vendor relationships for long-term success. Contact RealManage today to learn more.