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5 Tax Considerations when Hiring Domestic Workers by Joanie B. Stein, CPA


Posted on February 23, 2016 by Joanie Stein

Families are often unaware of the tax and legal implication that come with hiring housekeepers, nannies, caregivers, chefs, drivers or other workers that perform services in or around their homes. In fact, hiring someone to help around the home and improve one’s life may actually result in a complex web of tax regulations. Following are five issues that families should consider before hiring a domestic worker.

 

Employee or Independent Contractor. According to the IRS, domestic workers are considered employees, subject to payroll, tax and labor laws, when a member of the hiring family can control what work is done, how it is done and when it is performed. It does not matter how many hours the employee works or how he or she is paid. If workers derive a significant portion of their income from the work and the job has some level of permanence, they are employees.

 

Conversely, workers will not be considered employees when their services are available to the general public or when they use their own tools to perform the services, in which case they may be considered independent contractors.   Workers hired through an agency that directs how and when work is to be performed, will also not be considered employees of the hiring family.

 

Paying Individually or Through a Family Business. While it may be tempting to pay a domestic employee through a business account and claim the tax deduction on the payroll expense, such an action is illegal. Rather, families should apply with the IRS for an employer identification number (EIN) and be prepared to meet the legal and financial responsibilities that come with hiring an employee, including keeping accurate records of hours worked, paying employment taxes and filing required paperwork, including W-2s and Schedule H, Household Employment Taxes, of IRS Form 1040 with their federal income tax returns.

 

Overtime Pay. Under the Fair Labor Standards Act (FLSA), household employees are considered non-exempt workers entitled to overtime pay for hours worked in excess of a 40-hour workweek. The overtime rate is calculated as 1.5 times the regular hourly rate of pay.  More specifically, the FLSA cites the overtime rules apply to housekeepers, chauffeurs, cooks and full-time babysitters working more than eight hours a day for one or more employers. Exempt workers include “casual” babysitters and “companions” for the elderly as well as domestic workers who live in employers’ homes, such as full-time nannies.

 

Families that fail to meet the overtime rules expose themselves to the risk of wage disputes and the expense of back wages, taxes, penalties and interest, as well as legal counsel.

 

Employment Taxes. When a domestic worker is classified as an employee, the hiring family should be prepared to withhold and pay Social Security and Medicare taxes as well as unemployment taxes at the federal level and at the state level, when applicable.

 

Available Tax Credit. Families that hire a housekeeper, nanny or aide to care for a child under the age of 13 or a spouse or dependent who is unable to care for themselves may qualify for a credit for child and dependent care expenses. To claim the credit, the employee must provide care so that the taxpayer may work or look for work.

 

Hiring a worker to provide services in and around one’s home requires families to consider a broad range of personal, legal and financial issues. The advisors and accountants with Berkowitz Pollack Brant understand these challenges and work with families to take the steps required to make the process as simple and tax efficient as possible.

 

About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she provides individuals and businesses with strategic estate and tax planning counsel. She can be reached in the CPA firm’s Miami office at 305-379-7000 or at info@bpbcpa.com.