Did you know families that hire a nanny, senior caregiver or other domestic employee to work in their home have to follow payroll, tax and labor laws similar to most businesses?
the rules of being a household employer
Contributed by Stephanie Breedlove
For most families, these requirements might as well be a foreign language — they certainly were for me when I hired my first nanny. However, it’s very important to understand what your responsibilities are so you steer clear of financial and legal risk. The good news is that following household employment tax and payroll rules entitles families to significant tax breaks that can offset most — if not all — of their employer tax costs.
Here are four key things every family should know about being a household employer.
Your caregiver is your employee
When you hire someone to work in your home, the worker is considered your employee. Some families will tell you it’s OK to treat her as an independent contractor (using phrases like “you can just 1099 her at the end of the year”). This is incorrect and potentially a very expensive mistake to make. The IRS has ruled over and over again that household workers should be classified as an employee of the family for whom they work — not an independent contractor.
You must withhold taxes
You need to withhold taxes from your employee’s pay and keep accurate records for tax filing purposes. Your employee’s taxes will usually be about 15 to 20 percent of gross wages. They include Social Security and Medicare taxes, and federal and state income taxes (if applicable in your state).
For most families, on a quarterly basis you will be required to remit (pay) the taxes which have been withheld, along with the employer portion of the Social Security and Medicare taxes as well as federal and state unemployment insurance taxes.
Labor laws apply
Your caregiver is protected by federal, state and local labor laws. Household employees must be paid at least minimum wage for every hour they work. The current federal minimum wage is $7.25 per hour, but some states and municipalities have higher minimum wage rates. If you live in one of these areas, you must meet or exceed the highest applicable rate.
Household employees are also entitled to overtime pay (1.5 times the regular hourly wage) for all hours worked over 40 in a seven-day work week. The only exception is for live-in employees. In most states, live-in employees are exempt from overtime pay requirements, but must be paid for every hour they work.
You can take advantage of child care-related tax breaks
To lighten the financial burden, there are two tax benefits available to all working families, regardless of income level. However, they are only available if the employee is paid “on the books.”
Dependent care account — Most companies allow employees with child care expenses to contribute up to $5,000 of their pre-tax earnings to a dependent care account (also known as a flexible spending account). The savings are approximately $2,000 to $2,300 per year.
Child care tax credit — Those who don’t have access to a dependent care account can claim the tax credit for child or dependent care on their income tax return. Families can take a credit of 20 to 35 percent of qualifying child care expenses up to $3,000 for one dependent, or up to $6,000 for two or more dependents. The savings are usually $600 for families with one dependent and $1,200 for families with two or more dependents.
For most families, only one of these tax savings options may be used each year. The dependent care account usually provides the greater benefit. Oftentimes, the tax savings exceed the family’s employer taxes — actually saving money by paying on the books!
It may sound difficult, but complying with all your household employer obligations is easier than you think, and the peace of mind you gain is well worth the effort. And as a bonus, when you follow these guidelines, your employee is entitled to crucial benefits like Social Security and Medicare when she retires, unemployment benefits when she is between jobs, and a tangible employment history that is crucial for obtaining loans/credit. It’s a win-win for both parties.
About the author:
Stephanie Breedlove is the Vice President of Care.com HomePay, where she helps families to simplify and understand their responsibilities as employers of caregivers or household workers. She is one of the country's leading experts on household employment tax and labor law. When she isn’t busy keeping up with her two grown boys, Stephanie enjoys spending time outdoors in and around the Austin area hiking, biking and fishing.
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