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Nanny Taxes - Answering Common Questions about Classification

Posted by Vanessa Vidal, FPC on May 20, 2013 11:38:00 AM

HomeWork Solutions is a leading national nanny/household employee payroll and tax company. We work with thousands of families, and hear and respond to the same questions/concerns over and over again.  We want to take the opportunity to share this information with you through this easy to follow Q. and A.

Q.  Are nannies considered employees or independent contractors?  Does it matter how much she earns or how often she works for the family?

A. Nannies are employees. It does not matter if the employer wants to call her an independent contractor, or that she wants to called that. The distinction between employees and contractors is written in law, and hinges on control. The family has the right to control when she works, how the job is performed, and provides the place and tools for the job. It does not matter if the family grants the employee great latitude – they still have the right of control, and that is the central defining element of an employer-employee relationship.

How much the nanny earns only impacts the tax responsibilities of the family, and does not change the relationship.
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 Q. Why does it matter if you call a nanny an employee or independent contractor?

A. Misclassification of your employee has numerous risks and potential consequences.

  • Taxes: When you have an employee, you contribute to Social Security and Medicare programs, as well as unemployment insurance funds. Independent contractors pay higher Social Security and Medicare tax than employees, and are not covered by or contribute to unemployment insurance. If caught, the employer must make back tax payments, including employee FICA taxes that they didn't collect, and pay penalties and interest assessments.
  • Insurance: Employers can obtain workers' compensation insurance, important to cover liability in the event of a workplace injury. Independent contractors are not covered by workers' compensation. If there is a workplace injury, and the family is found to have misclassified their employee as an independent contractor, they can be held financially liable for the employee's injury.
  • Fair Labor Standards Act (FLSA): Overtime, minimum wage, and time tracking protections apply to employees, not independent contractors.
  • Enforcement: Catching misclassification of employees as independent contractors is a workplace enforcement priority. Federal and state governments are anxious to collect unpaid employment taxes, penalty payments, and insure that all employees are paying their income taxes.

Q.  If the nanny has a full-time job during the week and babysits for a bunch of different families on weekends, is the nanny an employee or independent contractor for the weekend families?

A. The nanny’s relationship with the weekend families will determine this. If she retains control – sets the pay rate, can say yes or no to the schedule, and can arrange for others to perform the work for her, then that is likely an independent contractor relationship. However, if Family A says they need her every Saturday from 6 PM until midnight, and only she can provide the services then this indicates an employer-employee relationship. Again, control is the central determining factor. The Internal Revenue Service's Form SS-8 is used to get an official determination of worker status.

Q.  If the nanny makes her living doing babysitting and temp jobs is she an employee or independent contractor?

A. Whether a job is full time, part time, or temporary does not matter at all when making the determination of employee vs. contractor. Control is the central matter. Frankly, it is very hard for a nanny or the parents to make the case that the family does not have the right of control – what and when to feed the children, approved and disapproved activities, schedule, etc. In the vast majority of circumstances an employee-employer relationship exists. Certain specialties – especially newborn care and doula services – are easier to define as a contractor relationship. After all these care specialists are engaged to interact with the family in a very different way than a temp nanny interacts with a family. The NCS or doula typically will set the rate of compensation, may engage other individuals to help provide the desired services, and exercises considerable control over the scope and nature of the provided services.

Remember, how much the employee earns only impacts the tax responsibilities of the employer, and does not change the relationship.

Q.  If the nanny works for an agency temping while she looks for a full-time job, is she an employee or independent contractor?

A. If the agency pays her, she is an employee of the agency. If the family pays her directly and pays the agency a daily or hourly fee for arranging the schedule/booking of the nanny to provide the services, she is an employee of the family.

Q. What the difference between a W-2 and a 1099?

A. W-2 Wage and Tax Statement is provided to employees. It will summarize the wages paid and taxes withheld from the wage. A nanny who receives a W-2 knows that the family is paying their portion of the Social Security and Medicare taxes, as well as unemployment taxes and workers compensation insurance.

1099 MISC is used typically by a business or family to document fees paid to an independent contractor. This independent contractor is responsible for self employment tax – essentially the employer and employee portions of Social Security and Medicare taxes. When a nanny employer provides the nanny a 1099 form, they are pushing their tax obligations over to the nanny. Not only is this not proper, but the IRS is cracking down on all businesses or families who issue 1099 forms, looking closely at the relationship between the parties (family and nanny in this circumstance) and prosecuting businesses and families who should have been issuing a W-2 form to the worker. This is an enforcement priority of the Obama Administration, and 22 states are working hand-in-hand with the IRS to do these examinations. States are interested because unemployment funds are severely depleted, and families who issue a 1099 are not paying their fair share of unemployment taxes.

HomeWork Solutions hopes you find this helpful … stay tuned for more upcoming discussions of common questions household employers and employees have. SUBSCRIBE TO OUR BLOG - DON'T MISS OUT!

Topics: babysitter nanny tax, worker misclassification independent contractor, domestic employer legal responsibilities, nanny non-exempt employee, nanny independent contractor, nanny tax compliance, nanny job description

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