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Clients Hiring Senior Care May Owe Nanny Taxes

Oct 24th 2019
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Don’t be fooled by the term “nanny taxes.” They don’t just apply to nannies. Any person who works in someone else’s home – including senior caregivers among others – could be considered an employee.

With the baby boomer generation aging, home health aides and personal care assistants are expected to be the fastest-growing occupations over the next several years, adding about 1.2 million new positions by 2026, according to the latest estimates from the Bureau of Labor Statistics.

That means your clients could be hiring in-home senior care for themselves or elderly loved ones. Here’s how to determine whether your client owes “nanny taxes” and needs to follow the tax, wage, and labor laws around household employment.

Establish who is the senior caregiver’s employer

Your client can hire a senior caregiver in a few different ways. How they bring on-board the caregiver will help determine whether they are now an employer.

If they hired through a home health care agency, the caregiver will be the employee of the agency. They’ll be paid through the agency and taxes will be the responsibility of the agency. It also means the agency controls which caregivers are sent to the senior’s home and what job duties they can perform.

Hiring through a referral or placement agency is a little different. For a fee, this type of agency will help your client find a senior care worker but then will hand over control of employment. That means your client will be responsible for payroll, taxes, insurance, and compliance.

By hiring independently, without the assistance of a third party, your client will also be considered an employer and has tax and payroll responsibilities.

Determine if the senior or their family is the employer

If your client has hired independently or through a placement agency, the next step is to figure out who is giving direction to the senior caregiver and is the employer. Usually, the person receiving care is determined to be the employer. However, if the senior is unable to give direction, an adult child could be considered the employer. Or if the senior is being cared for in their child’s home, then the child is the employer because the caregiver is working in their home.

Check wages against the Employment Coverage Threshold

Each year, the IRS sets its Employment Coverage Threshold. For 2019, the household employee coverage threshold amount is $2,100. That increases to $2,200 for 2020.

If your client pays a senior caregiver an amount equal to or above the employment threshold, then they’ll need to withhold Social Security and Medicare taxes from their employee’s wages and pay the same amount as an employer. Each will pay 7.65 percent for a total amount is 15.3 percent of cash wages.

You’ll also need to consider unemployment taxes. If your client pays their senior caregiver more than $1,000 in any calendar quarter, they’ll owe federal (FUTA) and state unemployment taxes (SUI). FUTA is six percent on the first $7,000 in wages. SUI rates and thresholds vary by state.

There are exceptions. If the senior caregiver is considered your client’s employee but is their spouse, child under the age of 21, or any employee under the age of 18, then they don’t need to count their wages for nanny tax purposes. For unemployment taxes, don’t count wages paid to a client’s spouse or a child under the age of 21.

In-home senior caregivers are employees and not independent contractors

Almost all household workers are employees and not independent contractors and misclassification is considered federal tax evasion. That’s because the employer (family or senior) sets the worker’s schedule, gives direction on how the work is to be done and provides the tools and equipment to do the job. It’s a matter of control and the family (or senior) has it. If your client has any doubts about their worker’s classification, they can complete Form SS-8 with the IRS.

Reducing your client’s tax obligation

Your client may be able to take advantage of tax savings programs and tax breaks to offset their tax liability. They could be eligible for:

  • Medical care tax deduction
  • Medical Care or Health Care Flexible Spending Account (FSA) – could cover medical expenses not covered by insurance if the senior qualified as your client’s dependent
  • Dependent Care FSA – if the senior lives with your client, is physically and mentally unable to care for themselves and requires a caregiver so your client can go to work, then they may be able to pay some expenses through a Dependent Care FSA.
  • Child and Dependent Care Tax Credit – if the senior is physically or mentally incapable of self-care, lived with your client for more than half of the year, and is either your client’s dependent or could have been a dependent under certain exceptions, then your client could qualify for this tax credit.

Take advantage of the Companionship Care Exemption

There is also the Companionship Care Exemption, which could mean the senior caregiver doesn’t need to be paid overtime for hours worked over 40 in a work week. This only applies if the family or senior is considered the employer. It can’t be used if the caregiver is the employee of an agency.

If the caregiver spends 20 percent of their time or less on “work” or things necessary to care for an elderly patient like bathing, dressing, cleaning, and cooking, then your client qualifies for this exemption. The caregiver’s time is mostly spent in fellowship and protection.

This could be a big financial benefit for a family to hire privately and not go through a third party if they think they can apply the companionship care exemption. Since a home health care agency can’t take advantage of this, they could rotate caregivers to avoid overtime, which means the senior may not get the same caregiver every day. Or, the agency could charge a higher hourly rate to your client to make up for their overtime costs.

Understanding tax, wage, and labor laws

Household employers need to follow tax, wage, and labor laws that pertain to domestic employment. These laws could include a Domestic Workers’ Bill of Rights; required workers’ compensation coverage; minimum wage, overtime, and sleep time rules; paid family and medical leave regulations; and more.

Your clients may prefer the control an employer has especially when it comes to the care of an elderly loved one. They can hire and retain the caregivers that fit best with their family and assure their senior gets consistent care. It may mean more work when it comes to determining taxes and making sure your client is compliant with tax, wage, and labor laws.

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