Tax Requirements for Household Help
Families who employ full-time household help often make inadvertent reporting mistakes that can become both costly and stressful when first discovered by state and federal tax officials. Here are some tips to help you avoid those mistakes:
- If you employ domestic help, which might include nannies, housekeepers, senior care providers, and more, tell your certified public accountant as soon as you hire. The presence of this employee in your household cannot be accurately reported on your state and federal returns if your CPA is unaware of the employee.
- These individuals are considered employees, not independent contractors, by the IRS; it is not adequate for you to simply provide them with a 1099 at year-end. In recent years, the IRS has staged a serious crackdown to discover employers who were classifying certain employees as independent contractors, but who are defined as employees by the IRS and the Department of Labor. If you misclassify a worker, you may be held liable for employment taxes for that worker as well as significant State and local penalties. Since you will be considered an employer, you will be required to get a federal ID#.
- If you hire full-time domestic employees - whether household help, nannies, or care providers - make sure they are allowed to work. Complete the I-9 Employment Eligibility Verification Form and decide if you want to give them the option of having federal, state, or city taxes withheld. As an employer, you must also withhold FICA taxes from the employee. Make sure that the employee understands that you must and will withhold taxes from their gross pay (or if you wish you may pay them on their behalf). Make it clear at the point of hire what the difference will be between their gross and net pay, so that they are not surprised on payday and understand that they must also pay taxes on their wages.
- Pay your household employees an hourly wage as well as overtime, as required by the Domestic Worker Bill of Rights that has been passed in several states, including New York. Note that federal law exempts employers from paying overtime to live-in employees, but they must be paid for every hour they work.
- Make sure that your employee earns paid time off, holidays and sick leave, as required by your state law. Federal law does not require these benefits for household employees, but recognizing their rights to these benefits will help you attract and retain a higher quality employee.
- Coordinate with your insurance agent to make sure that all the proper coverages are in place to protect you, such as workers' compensation, disability insurance and umbrella liability coverage.
The use of full-time help in each of these scenarios is an increasingly common practice, with many households employing multiple employees (gardeners, landscapers, drivers, etc.). Bad practices can be compounded if you have full-time staff at multiple residences.
Should you employ anyone on a full-time basis, make sure to discuss the situation with your Berdon advisor, so that the tax situation will be handled correctly from the point of hire.
Questions? Contact your Berdon advisor