Tax issues abound with household employees because many employers aren’t sure how to deal with payment of a household employee. Here are four ways to avoid tax-time problems with household employees.
1. Don’t misclassify a household employee as an independent contractor.
With the IRS increasingly vigilant in regards to employees v. independent contractors, it remains important to double check your employees’s status. Many people don’t know that household employees are held to the same standard as regular employees: if the family controls, who performs the work, what work is performed, when or how the work is performed, the household employee is an employee, not an independent contractor.
2. Look at overtime.
Under the Fair Labor Standards Act, nannies and household employees are classified as non-exempt workers. Generally, live-in nannies are subject to the live-in nanny exclusion; however, in the state of Maryland, live-in nannies must be paid overtime, though there are unique requirements for live-in domestic employees.
3. Don’t put the nanny on the company payroll.
It is illegal to put a household employee on the company payroll. It is also illegal to include a household employee’s payroll expense in the company payroll and tax reporting. There is a separate household payroll reporting process. If the expenses are for childcare, then the dependent care tax breaks may be available, however, this needs to all happen on the individual return.
4. Don’t wait until tax time to deal with the tax implications of household employees.
Withholding, state wage reporting–don’t hesitate to deal with the problem. If you aren’t sure whether a household employee is actually an employee or an independent contractor, you can fill out Form SS-8, and the IRS will determine whether the worker is an employee or an independent contractor. Be aware, however, that this process can take up to six months. Talking to your CPA is a much more efficient option.
This posting is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this posting should not be acted upon without specific professional guidance. Please call us if you have questions.