Even an experienced accountant may overlook some of the nuances to tax and labor laws that affect clients who employ nannies or other household help, and with approximately 2 million domestic workers in the United States, chances are this may apply to your individual clients.
These mistakes can lead to fines and penalties for the family, an IRS audit, or a lawsuit from a disgruntled employee. Here’s several steps to help avoid those risks and keep your clients compliant:
1. Classify the household worker as an employee. It can be tempting to consider a nanny or housekeeper as an independent contractor, issue them Form 1099 at the end of the year, and have the worker pay both the employer and employee taxes. However, misclassification of a household worker is considered tax evasion.
Families who are hiring a domestic worker should know the differences between an independent contractor and an employee. Generally, if you define the work that needs to be done and control how it is done, you are an employer and the person filling this job is your employee. Nearly all of the time, the IRS classifies a nanny as an employee. They should have taxes properly withheld and receive a W-2 at the end of the year.
When in doubt, submit Form SS-8 to the IRS for a determination.
2. Complete all required paperwork and forms. When a family hires someone to work in their home, they need to take care of the paperwork that comes with being an employer. This includes Form SS-4, Application for Employer Identification Number; Form W-4, Employee’s Withholding Allowance Certificate; and Form I-9, Employment Eligibility Verification. Make sure to use the new, “smart” version of Form I-9.