7 Compliance Steps for Clients Who Hire Household Workers
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.
At the end of the year, your client needs to provide a Form W-2 to each employee, submit Schedule H (which reports household employment taxes) with their personal tax return, and Form W-3 to the Social Security Administration.
Individual states also have requirements for household employers, which can vary by state. These may include an Unemployment Identification Number, Withholding Certificate, and New Hire Report.
3. Carry workers’ compensation insurance. In some states, household employers are required to have workers’ compensation insurance for their full-time employees. Other states also include part-time workers. Workers’ compensation helps protect an employee who is injured or becomes ill on the job by covering necessary medical expenses and a portion of lost wages. A homeowner’s insurance policy may not cover these situations. If there is a workers’ compensation claim, and the family is required to have coverage, they can expect to be contacted by the state and should be prepared to open their wallet.
4. Withhold and remit the proper taxes. Household employers need to pay Social Security (6.2 percent of an employee’s gross salary), Medicare (1.45 percent of gross), and federal unemployment taxes. Household employers can use Form 1040-ES to pay estimated taxes on a quarterly basis. State unemployment taxes are also paid by the employer and vary by state.
Household employers also need to withhold the same percentages of Social Security and Medicare from their employee’s pay. Withholding federal and state income taxes is optional. However, a family must withhold income taxes based on the employee’s W-4 form. How much to withhold depends on the employee’s income and filing status.
Currently, five states (California, Hawaii, New Jersey, New York, and Rhode Island) require household employers to withhold additional taxes from their employee’s pay for disability insurance.
Household employers should be aware of any city, town, county, or school district income taxes, which they may be required to pay or withhold from their employee’s pay.
5.Understand legal nuances specific to household employment. A number of states, including California, Connecticut, Hawaii, Illinois, Massachusetts, New York, and Oregon, have implemented regulations for household employers that go beyond tax obligations. They are commonly referred to as “Domestic Workers’ Bill of Rights” and may indicate how often an employee should be paid, limits on consecutive days worked, required time off, and more.
6. Follow minimum wage and overtime pay regulations. As an employer, a family with a domestic worker must follow minimum wage and overtime pay regulations. According to the Fair Labor Standards Act (FLSA), household employees must be paid at least the federal minimum wage or state minimum wage, whichever is higher. Some metropolitan areas have minimum wage requirements that are even higher than the state.
Household employers are also required to pay overtime of one-and-a-half times the regular pay rate for work exceeding 40 hours in a week. However, some live-in nannies are exempt from overtime depending on the state in which they are employed. Keep in mind, state and local laws for overtime vary and may supersede the federal FLSA law.
7. Monitor changes to tax, wage, and labor laws that could affect household employment. Additional states are considering their own versions of a “Domestic Workers’ Bill of Rights.” The update to the FLSA’s threshold for overtime exemption would have impacted household employees, as most are not exempt from overtime rules. However, a federal judge in Texas recently issued a preliminary injunction delaying implementation. These are just two examples of changes to employment laws that, if not followed, could place a family in noncompliance.
If following these seven steps seems time-consuming, you’re right. The IRS estimates that it takes a household employer 60 hours each year to comply with all federal and state tax laws.
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Guy Maddalone has more than 30 years of experience in the payroll, human resource, and employment services industries. In 1991, he founded GTM Payroll Services to provide payroll, tax, compliance, and insurance administration for families that hired a nanny or other household employees. Guy...