Landlords will often hire a resident manager to handle the day-to-day tasks of running an apartment building. In some locales, and depending upon the number of units in the apartment complex, resident managers are required. For example, in California, resident managers are required where there are 16 or more units, while the requirement applies for 9 units in NY City.
The managers may be compensated for their services, provided reduced or free rent, or a combination of both. The tax implications to the landlord and resident manager are:
Resident Manager – If the resident manager is compensated monetarily, they are treated as an employee and as such are subject to payroll withholding, and FICA. If they are provided reduced or free rent, that reduction is not included in taxable income (Reg. Sec. 1.119-1(b)) if:
- The lodging is at the landlord’s rental property,
- The lodging is furnished for the convenience of the landlord, and
- The manager is required, as a condition of employment, to live in the apartment building. (Code Sec 119 – Meals or lodging furnished for the convenience of the employer)
If the above conditions are NOT met, the rental FMV is taxable income to the manager reported on a W-2 by the landlord or other employer (Letter Ruling 9404005).
From Pub 15-B, pg 15:
Example of nonqualifying lodging - A hospital gives 
Joan, an employee of the hospital, the choice of living at the hospital free of charge or living elsewhere and receiving a cash allowance in addition to her regular salary. If Joan chooses to live at the hospital, the hospital can't exclude the value of the lodging from her wages because she isn't required to live at the hospital to properly perform the duties of her employment. (IRS Pub 15-B, Pg. 15)
Landlord - If the resident manager is compensated monetarily, then the manager is a W-2 employee of the landlord and subject to the normal W-2 withholding and reporting requirements. Where the landlord reduces or provides free rent, whether or not also compensating the manager monetarily and the three conditions listed under resident manager are met, the landlord has no reporting requirements regarding the free rent and no deduction for the free rent since the lack of the rental income constitutes his adjustment for the lost rental income.