A recent Forbes article sums this reoccurring argument up nicely – the government’s massive enforcement surrounding worker classification, or misclassification, is all about money, lots and lots of money.
“Having employees triggers federal and state tax withholding, anti-discrimination, health care, pension, worker’s compensation and unemployment insurance obligations. You avoid these entanglements by hiring independent contractors, or do you? If they are really independent contractors, sure, but labels aren’t enough.”
Misclassification of household workers as independent contractors – issuing a 1099 instead of a W-2 for tax reporting – is one of the most common mistakes families make. Calling a nanny or a senior caregiver an independent contractor sounds like a good deal to families – no complicated tax forms or payroll taxes to pay. The reality, however, is that calling a nanny or senior caregiver an independent contractor doesn’t make it so, and the US Department of Labor provided states more than $10 million in block grants in 2014 to focus on misclassification and enforcement. Why all the attention?
- Unemployment Insurance: When a worker is classified as an independent contractor, there is no unemployment tax paid into the system. More importantly, many argue, the workers are unfairly denied the protection of unemployment benefits between jobs – and nanny and senior care jobs turn over with some frequency. While money is the root of the government interest, basic fairness is at the root of major educational outreach efforts by groups such as Domestic Workers United.
- Workers’ Compensation Insurance: When a worker is classified as an independent contractor, the family does not have a Workers’ compensation insurance policy. This is particularly critical in senior care where the caregivers often have physically demanding work helping the care recipient to transfer – from bed to chair, getting in and out of cars, etc. Working with aging adults who have mobility challenges puts the senior caregiver at greater risk to musculoskeletal injuries that require medical attention. Workers’ compensation insurance is protection for an employee and the family against these expenses for on the job injuries.
- Self-Employment Taxes: A nanny or a senior caregiver who is misclassified as an independent contractor pays much higher taxes because they are in effect paying both the employer and employee portions of Social Security and Medicare taxes. The employer is in fact transferring their employment tax responsibilities on to the nanny or caregiver, and is a common reason for the nanny or caregiver to blow the whistle directly with the IRS, who almost always rules in their favor.
HomeWork Solutions has two great resources to help you and your employee understand the difference between a Household Employee and Independent Contractor. The Employee v. Contractor Decision Wizard tool will step you through proper classification of a worker. And the helpful video below futher illustrates the important differences between an employee and an independent contractor.
We encourage you to share these resources to help others to avoid these mistakes. It is not too late to get 2014 household payroll tax matters properly organized. We welcome your calls to 800.626.4829 - we have friendly and knowledgable staff ready to help you out.