I am the youngest of six and learned many lessons of ‘what not to do’ from watching my siblings. I observed to the owners of HWS the other day, after taking a client call, that we fix the same problems over and over for different clients. Knowledge is power even when the knowledge comes from seeing the mistakes of others.
I want to share with you my top 5 mistakes your ‘employer’ siblings have done before you so that you can learn ‘what not to do’.
- Independent Contractor vs Employee.
- Paying off the books
- Paying part on the books and part off the books.
- Not understanding what agreeing to a NET wage means to you.
- Understanding and Reconciling Employee Taxes
Here is a little more about each of these mistake.
Independent Contractor vs Employee.
If you have someone working in your home, who is following your specific instructions, who you set the schedule and provide equipment to complete the task…..you likely have a household employee. I have helped many clients unravel years of payments made in prior years to catch up on payroll taxes like Unemployment, Social Security and Medicare. This is so common, we have actually put together both a Employee v. Contractor Decision Tool and a video.
Paying off the books.
Hiring a nanny to care for children, or a caregiver for an elderly family member can be expensive. These employees often work long hours. The cost of employing household workers often makes it tempting for families not to report paid wages, since reporting carries additional financial obligations related to unemployment insurance and other benefits. However, the risks to families who do not pay their domestic employees "on the books" are considerable and serious.
Paying part on the books and part off the books.
This seems innocent enough on the surface but I have learned over time that this can come back to haunt you. Maybe you agreed to this so your employee could keep her subsidized health insurance with the state. Your household budget may have been a factor. Whatever the reason, it can cost you in the end. Let’s say you paid part on and part off the books for 5 years. Then let your nanny go because you no longer needed one. The nanny has trouble finding a new job and files for unemployment. She is likely to put down the full amount you paid to get the most benefits. However you reported half that amount in taxes. The cost of amending tax returns, catching up with tax payments, penalties and interest in not worth this risk. Not to mention that YOU are on the hook for both employee and employer Social Security and Medicare taxes - an expensive proposition.
Not understanding what agreeing to a NET wage means to you.
HWS blogged about this recently and again it is so common it is part of our video library. The concept of paying NET is unique to the household employee world - in no small part due to competition with jobs paying cash under the table. A candidate that asks for NET or Take Home pay does successfully communicate what s/he wants to take home. Agreeing to a NET wage is not the best practice. You need to do the math and make sure you understand what you are paying the employee and how that impacts your tax obligations. HomeWork Solutions is always available to help with this 'reverse engineering' of a wage.
Understanding, Filing and Reconciling Employee Payroll Taxes
Payroll taxes are both simple and complicated. That is why we are here and do the heavy lifting for you. You should still have a good understanding of what these taxes are and how they affect you. There are six types of taxes when it comes to payroll taxes. They are Social Security, Medicare, Federal, State, Local (if Applicable) Income Taxes and Unemployment Taxes. Social Security and Medicare are a two part tax, an employee portion and an employer portion. These taxes plus any withheld Federal Income taxes are reconciled annually on YOUR personal tax return with the Schedule H which we prepare for you. Withholding of Federal, State and when applicable Local taxes are optional for household employers. It is a best practice to withhold income taxes for your full time household employees to help them avoid big, unplanned for tax liabilities at year end.
Bonus Mistake #6
Not Obtaining Workers' Compensation Insurance.
Many states require that you have a workers' compensation insurance policy when you have a household employee - and whether required or not it is a best practice to have this insurance to protect YOU and your household. If workers' compensation is required and your don't get it, you face large penalties for not having this insurance. I often take calls from clients who have confused unemployment with workers compensation. Workers' compensation insurance protects the domestic employee and the employer from the expenses and liabilities associated with a work-related accident. A single accident can leave the employer liable for thousands of dollars in medical bills. Don't assume that this liability is covered under your Homeowner's Insurance Policy! Unemployment insurance is a tax that funds your state unemployment system - it is insurance for employees who lose their job through no fault of their own, it is a tax to the employer.
Knowledge is power, now you know the ‘what not to do’ most common household employer mistakes.