The CPA or accounting professional is often the first resource a family consults when hiring a nanny or senior caregiver. Families have questions about their tax responsibilities and the myriad rules and responsibilities that surround their new role as a household employer. You of course are knowledgeable about household employment taxes (the so-called “nanny taxes”) and have probably assisted many families to report and pay these taxes as part of your personal income tax practice. While you and the family can of course refer to IRS Publication 926 for specifics about Federal household employment tax reporting, your experience tells you this is not the end of the story.
Most families don’t have the expertise, time or inclination to address these obligations properly. All too often, you are consulted after mistakes have been made, deadlines have been missed and the family finds themselves in a dubious pen-pal relationship with one or more taxing authorities.
You can help your clients avoid some very common mistakes by coaching them on key elements of their caregiver’s compensation agreement. A family that covers these bases at the time of hire not only solidifies the employment relationship with their caregiver, they also establish a framework that helps them avoid costly wage disputes down the road. Clear communication on important aspects of the financial relationship is essential.
1. Always state wages in gross pay terms!
Many household workers have never worked ‘on the books’ and have no working understanding of payroll taxes. It is common for the caregiver to state their salary requirements or hear a job offer in net wage, or take home pay, terms. Your client and their caregiver are often not speaking the same language; it is imperative that your client take the time to explain what the wage offer is, as well as what taxes they will be deducting from the paycheck. Suggest they use an online payroll calculator to prepare a sample paycheck calculation and go over this in detail.
2. Detail payroll tax deductions!
Your client, as a household employer, is responsible for Social Security, Medicare and unemployment taxes. Household employers, however, are not legally required to deduct income taxes from their caregiver’s wage. Your client may tell the caregiver that they are “deducting taxes”, and when a W-2 form is prepared the caregiver realizes no income taxes were deducted and they owe what is to them a substantial tax bill. A best practice is to provide a pay stub with each paycheck with clear itemization of wage calculations and tax deductions. The household worker who may have been paid cash under the table in previous jobs may need some extra hand holding to help them understand.
3. Pay by the hour, and don’t forget the overtime!
The Fair Labor Standards Act classifies household employees as non-exempt workers. Non-exempt workers are hourly employees, and they must be paid for every hour worked. Many families will offer a fixed weekly wage that they guarantee. It is imperative; however, that this wage be documented at its proper hourly rate, including an overtime rate if required. Anytime a caregiver works extra hours outside the weekly guaranteed schedule, the family must pay for those extra hours. It is illegal to offer compensatory (comp) time or to bank hours. A work week is defined as a fixed 7-day period, and hours over 40 must be paid an overtime differential of at least 1.5 times the regular hourly rate in accordance with state and federal law.
State regulations increasingly are expanding domestic worker rights and protections – household employees in California, Hawaii, New York, Maryland, Massachusetts and Minnesota all enjoy workplace rights that exceed those established at the federal level. Many other states are considering proposals that expand domestic worker rights. Labor law enforcement has stepped up nationally, and household employees increasingly are encouraged to file wage and hour grievances when they believe their payroll is not being properly calculated.
Special Rules for Live-In Caregivers: Federal law does not require a family to pay an overtime differential to live-in caregivers, but these workers must be paid their hourly rate for every hour worked. Bear in mind, however, that many states have stricter standards and your clients are bound by the rules and regulations in their state.
4. Document paid time off, including sick and holiday pay!
Your client is not required by federal law to provide any paid time off for vacation, sick or holiday pay to a household employee. Most household employers offer some basic paid time off to help attract and retain the better workers, and state and local ordinances are in place across the country to provide a minimum suite of paid time off benefits to household workers. Your client may wish to pay for certain federal holidays, for example. These should be specifically identified in the written compensation agreement. Family policy for vacation and sick pay, including accrual, must also be articulated.
5. Get Ahead of the Curve!
All too often clients will wait until tax time to mention that they hired a household employee, thinking that, as their accountant, you will take care of their obligations with their personal tax filing. While this is true for Federal household payroll taxes, they don’t realize that state requirements, such as new hire reporting, quarterly unemployment tax filings, worker’s compensation insurance requirements, etc., are issues best addressed at the time of hire and not months later during tax season.
For this reason we recommend that you include a friendly reminder in your periodic communications to your high net worth clients reminding them to contact you if and when they hire a domestic employee and not wait until tax season so that you can get them setup correctly from the get go.
If your firm does not specialize in household payroll, refer to a trusted partner that specializes in household payroll that can assist your clients with expert advice at the point of hire. A household payroll service like HomeWork Solutions will help the family address all of the issues above, including obtaining worker’s compensation insurance. Proactively addressing the issue with your clients will save you time and valuable resources during critical tax season. Furthermore, you strengthen the relationship between you and the client because it demonstrates that you and your practice are dedicated to looking out for their best interests.