Tenant/Mgr - Salary or Free Rent

Rehabbing, Fix and Flip, Rental Properties
1

The current owner is giving this guy free rent to collect rents, show the apartments (46 of them), clean the halls in both buildings, put out the for rent sign, and do handy work. That apartment runs $395 for his 1 bedroom. Should I keep it that way or pay a salary with workers comp.

I think if I pay him, the income will look strong when I sell it as it increases the income $4740 per year, and someone said to definitely get WC to cover him getting hurt on the job. On the other hand, he may just keep the salary and pay rent late, so I want to avoid that scenario too. Oh decisions decision.

So what do you think? Free rent? Salary? and Workers Comp?

2

Good question, Ihave the same problem right now. I don’t really want to pay workmans comp tho???
What do the rest of you do?
Wendy

3

I think that it’s VERY RISKY giving free rent without paying him at least the minimum wage and worker’s comp. Maybe you could count the free rent toward the minimum wage.

If this person ever has a dispute with you, he will complain to worker’s comp, the state labor board, and everyone else he can think of because you are not following the employment laws in your state. This could not only result in back pay, but also a hefty fine from the state.

That’s the rosey scenario. If he falls changing a light bulb or has any type of injury, he could sue you and probably win. Will your insurance cover this situation since you are operating illegally without worker’s comp?

Mike

4

Bingo Mike,

Same here in WA. The critical point is to make sure you’re paying the necessary employer contributions (941, FICA, state unemployment and most importantly for you, the owner, the worker’s compensation).

And it really doesn’t matter if we pay a salary or rent allowance, it all adds up to the same NOI. You just have to make sure your financial statements are set up to report it correctly.

But definitely cover your behind on the taxes and insurance. One incident can wipe out and go beyond anything you might save on not paying them.

Cate

5

Mike,
First of all thanks for the good information! Second, how do I go about setting up the workers comp and payroll for such? and Third, the Tenant/Mgr has a full time job already, and just does these simple things on the side. He probably puts in a total of 5 to 10 hours a week and gets an apartment worth $395 a month, which I am happy to continue because my other option is to pay a Licensed Manager at $1250 plus 100% leasing fee.

How should I structure making him an employee with workers comp, and how would I know how much to contribute to SSI, etc. Can I make him a part time employee and pay $395 per month? If I need an attorney to draw up an employment agreement - should he be based in the city where the apartment is, or can it be my attorney in LA.

Thanks, Jag

Thanks, Dee

6

Mike
Please send me the link to the book - I couldn’t find it. Does it cover these questions. What is in it?
Jag

7

Very common in some businesses, such as restaurants. that workers get paid both on the books, and off. But here’s an idea if you want to play it straight.

I have a worker here, with a garnishee, and employee loans outstanding, so what happens, I issue a payment with a bunch of deductions.

Say your manager only gets free rent now, say for $400/month. You issue him a paycheck for say $400.00, deduct $300.00 for rent, so you have a few buck to make deductions. He might balk at getting paid less, so you might want to gross it up, issue a gross check for $450.00. By doing it this way, he’ll actually cash a paycheck for your records.

If you deduct $300/month in rent, then have him pay you $100 separately.

If you’re totally CLUELESS where to get workman’s comp, sign up with a payroll service and they’ll do it for you. The challenge is finding one that would do it for ONE EMPLOYEE. They are out there.

If you rather not go with a payroll service, get on the net and find out what the procedures are in the state you plan to operate in.

I don’t use a payroll service, and have a policy where I pay the insurance separately. Payroll services had been pestering me since many owners are clueless where to get workman’s comp.

8

no free rent!; provide a rent credit (i.e. he paid full rent and you issue him back a check). Also document duties and responsbilities and have him sign a copy of it. Otherwise, your manager might just become a freeloader.

Also, I’m not sure given the situation why you could not consider him an indepedant contractor/consultant and just 1099 him at the end of the year and let him worry about the reporting.

9

Here is NYS, a 1099 guy is responsible for getting his own workman’s comp. Good luck making sure he does.

If you do the payroll, deduction, pay workmans’s comp, theres’ no and if’s or buts.

Had an accident at our business, and two guys are on workman’s comp, third guy on a 1099. The liability insurance company tells me they don’t want to hear anything about the 1099 guy, because it should’ve been under workman’s comp - says so in the policy. I’m totally uninsured, and the guy was in the hospital for a week.

So I put the guy on the payroll, retroactively, and paid workman’s comp on him, and workman’s comp paid the claim.

10

How do I set it up so that he is an employee? Through a CPA, bookkeeper, myself, or an attorney?

 and

Since I live in CA and the property is in Ohio - I guess he would collect the $25 or $30 application fee in cash. Should he keep this fee instead of getting paid, or should I keep it all separate?

 (I guess he'll ge going to lunch too MIke)
11

You can set up his employment status with any of the methods you described. It is not difficult to do it yourself. The instuctions can be found at www.irs.gov.smallbiz, & www.irs.gov. There is a publication that you can download that tells you about the form 941 (withholding for your tenant, employer contribution) that you are required to file. This publication is a pdf at http://www.irs.gov/pub/irs-pdf/i941.pdf. You can get general info about Ohio worker’s comp and the application at these addresses: www.ohiobwc.com and www.ohiobwc.com/employer/forms/coverage/default.asp.

You also need to ensure that your liability insurance includes your employee. Employees sue when they get insured or fake being injured. I HATE DEALING WITH EMPLOYEES!

Good Luck,

Mike

12

If you use CPA, attorney, they would have to know Ohio tax and legal issues. You’re out in CA. I worked for large corporations where they use nationwide legal and CPA firms, who can advise you on issues everywhere. The monthly retainers are expensive.

Here if I go to a small local CPA or legal firm, and ask about Ohio law, they’ll probably give me a blank stare.

I write payroll checks to my employees everyweek, and it is simple enough that I track the gross pay, deductions, withholdings, etc. And there is an employer contribution for FICA Medicare. Workman’s comp is a percentage of gross pay, on a policy thru the New York State Insurance Fund, adjusted annually based on a percentage, and I accrue it weekly, though I could’ve just expensed it as the monthly bills for premiums are received.

There is supposed to be an annual audit in NY. The CPA takes care of that, because on site audits can raise other issues. Here, I would have to prove my 1099 contractors themselves carry workman’s comp, or they would charge me as if they were on my payroll. And here. if something happens to a 1099, and they didn’t pay their premiums, I’m on the hook, and my liabilty insurance don’t want to hear about it.

The challenge is all the deadlines for withholdings. The 941 that Mike mentioned I make monthly payments with a coupon, though under a certain threshold, you can pay quarterly. Quarterly 941’s are required, in my case, reporting what is due, against what I paid.

I just paid the Federal 940 yesterday, which I pay once a year. The state witholdings are also due quarterly, the NYS-45, and I paid that yesterday, for the last quarter of 2006. Just prepared the W2’s to employees, 1099’s, and another W3 summarizing the W2’s

While I can do the returns, I got a proforma spreadsheet for the 941, NYS-45 where I double check my CPA’s figures. Why use a CPA?? He calls me when he needs the numbers to meet the deadlines, and got the software to generate the forms. Of course, I get the forms here myself, and if I have the discipline to know all the deadlines, I can do it all myself.

Most people busy running there business rather not bother with all of this, and just sign up with a payroll service. Years back, ADP and Ceridian only does large companies. Recently, I saw a promotion at Staples where ADP is looking to do mom and pop’s, and small businesses are asked to drop business cards in, and there’s a monthly drawing for a prize.

One CPA firm I rented space in when I had my consulting business does payroll for small firms, even for one employee, and they issue the paychecks, fill out all the firms, make the 940, 941, NYS-45, and workman’s comp payments.

I bank at JP Morgan Chase, and on a few occasions, when my small biz rep saw me come in coralled me to her office, and I had to sit thru a presentation of their payroll service. They claim that they would take care of workman’s comp for me at a great rate thru their carrier. I get mine thru a group plan thru my trade association where I get a rebate each year. It was around 17% last year.

I mentioned before I’m in the process of selling my biz. I did all of this myself because I dedicated myself to do all the administrative work. It’s pitifully boring, and when I have to deal with 8 employees, stressful.

If I go into another business where I’m more active in day to day operations, I would certainly spend a few bucks on a payroll service, unless of course if my CPA can handle it all, including issuing paychecks and paying the payroll taxes when due.

13

I have payroll and wc done through Paychex. So far its great. They take ALL the liability (taxes, mistakes, etc). For 4 employees with their fee added in it comes to 20% on top of the hourly rate. So if I pay someone $10 per hour, its really like paying them $12 per hour.