Employee vs Independent Contractor, Rent, etc.

[Zee]

A boat rack-o-minium Association contracts with person to manage the racks and he employs his own staff to operate lift equipment, maintain the racks, etc. He also pays his own liability insurance. Only limited direction is provided by the Association.

All other expenses are paid by the Association. In addition, the manager is provided the use of a ship's store to do with as he wishes (at no cost). At the present time some of the space is used as a deli, supplies store & bait, and office. Gas is also sold. The ship's store is owned by the developer, not the Association but the Developer/Association agreement requires the rental of the ship's store. It's very expensive $9000 month.

At the present time, the manager retains any profits made from the operations including gas sales, and a percentage of billings he receives from a mobile mechanic operations that is at the facility each day.

According to the Association, the intent was for the Association to share in the profits thus reducing the monthly Association fee to owners. That hasn't happened.

My first question pertains to the Independent Contractor question. As it is now performed, it does seem to meet most of the requirements of an Independent Contractor relationship. There is no reporting to the Association of profits, etc, and little oversight.

But, what about the FMV of the building being provided for the manager's other endeavors? It would seem to me the FMV of the rental is taxable compensation?

I would appreciate any input that can be provided. The Association has reduced the fixed amount of the contract and suggested the manager reduce the number of his employees by one. As expected, the manager doesn't like that idea. So, a change may be in order. One last question. What is the average % sales received by the landlord in a retail lease?

[taxea]

Employee vs Independent Contractor, Rent, etc.

All specifics of the arrangement should be spelled out in detail and agreed to in a written contract. That is where you need to look for answers to your questions. This does sound like an independent contractor arrangement but if so, the association has no control over how the IC runs the business. If there is no written contract (agreement) then your client should insist on one yesterday. taxea

[Zee]

There is a contractual agreement that is being re-written. However, I'm not sure it's an independent contractor situation using the 20-question technique. For example, full-time is implied (but not required), all work is performed on the Association's premises, but I'm also leaning towards the situation being an independent contractor situation.

So, if it is, the board must be careful not to add requirements that are being discussed, revenue-sharing, an accounting, etc.

Do you have an opinion on the FMV of the rental deli/store space being provided for free? As I said, it's substantial since the cost exceeds $9000 month, and the Association also pays the insurance and taxes which are also very high. My opinion would be this is taxable compensation and should be reported on a 1099. What do you think?

[taxea]

Employee vs Independent Contractor, Rent, etc.

The contract between them MUST address all of the agreements between your client and the association. The association is contracting with your client to manage "consessions" on their property. There should be a clause that explains what service/s are/is being provided by your client "in lieu of rent" for the building he is using on the property. Whatever this is, it would be income to the association and an expense to your client.

It is up to the Association to put a value on this "in lieu of rent" item. taxea

[Zee]

The contract between them MUST address all of the agreements between your client and the association. The association is contracting with your client to manage "consessions" on their property. There should be a clause that explains what service/s are/is being provided by your client "in lieu of rent" for the building he is using on the property. Whatever this is, it would be income to the association and an expense to your client.

It is up to the Association to put a value on this "in lieu of rent" item. taxea

The Association allows the independent contractor to use the building rent free. My client is the Association. The contract is for the independent contractor to provide boat forklift services (dropping boats in & out), maintenance, etc. on the rack not to provide concessions. The store has been available at no cost to the independent contractor for the concessions.

The contractor purchases the store inventory, etc. and retains all profits. So, I don't see how the Association would have income, but they do have the lease expense, taxes, insurance, etc.

I believe the free rental in lieu of a cash payment constitutes earnings to the independent contractor based on the FMV of the rental. If not, why?

[taxea]

Employee vs Independent Contractor, Rent, etc.

I disagree, they are contracting to him to manage certain services on their property...he has the use of the area but is not required to pay for the use. I don't see any reason why he would have an income or expense rent issue here.
The association opted to take the expenses on the area that the IC is using...no consequence to the IC in my opinion.

My comment about the Assoc income is based on your statement:
" the intent was for the Association to share in the profits thus reducing the monthly Association fee to owners".

the fact that the Assoc. is providing the workspace is for their convenience and the fact that they opt not to charge rent is also their choice. Many IC's provide services at the contractee's business...that doesn't make them an employee nor does it demand that they pay rent. taxea

[Zee]

OK. I'm beginning to agree with you.

However, the agreement isn't really working well. As you might expect, the contractor is spending much more time on his other activities and less on the racks, requiring more employees (which he pays). As such, the Association has offered a reduced rate for the next contract suggesting he can operate with one less employee. This could easily be accomplished.

Frankly, as a rack owner I don't like the substantial referral fees (I suppose I could call them kickbacks since owner's are unaware of this practice) he also receives on maintenance work and other items.