Do you hire, manage and issue payroll to a beneficiary’s caregiver(s) in your capacity as a trustee? If so it is important to understand the legal and tax obligations this type of employment creates for both the trust and you personally.
As a trustee, you are “held to a high standard of performance, considerably higher than the performance acceptable for one's own affairs.” As a trustee you can be held personally responsible for actions you take that create risk to the beneficiary, and may be responsible financially for all monetary consequences of these actions.
Families that hire household employees, whether a nanny for their children or a caregiver for elderly or disabled adults, assume a host of legal and tax obligations as household employers. Trustees, including those managing Special Needs Trusts (or supplemental needs trust), assume similar obligations with the added risk that a legal or tax misstep can threaten their livelihood.
It is critical to address the following issues at the time of hire, before missed compliance deadlines create expensive fines and penalties.
- Worker Classification: The temptation to call the privately employed caregiver an independent contractor is great. Independent contractors pay their own employment and income taxes, and the persons hiring an independent contractor appreciate this convenience and reduced costs. However, it is rare that a privately hired caregiver fits the legal classification of independent contractor. In fact, in almost all cases a privately hired caregiver is an employee of the employer paying their wage. While the independent contractor designation may be the preference of the caregiver and trustee alike, this arrangement violates tax law and creates considerable risk to the trustee.
If you are unsure of a worker’s status contact a tax employment professional. You can also use our Employee or Independent Contractor Decision Tool which will step you through the key aspects of the employment relationship that the IRS uses to determine worker classification. Note only the IRS can determine worker status. To request the status of a worker from the IRS complete Form SS-8.
- Workers’ Compensation Insurance: Household employees in most states are required to be protected by the employer with Workers’ Compensation Insurance. State law may classify the failure to provide workers’ compensation coverage as a criminal offense. Caregivers to the elderly and disabled are at particular risk of personal injury due to the physical nature of the personal care services they provide. Workers’ Compensation Insurance coverage is vital because workers’ compensation is the “exclusive remedy” a worker has against his/her employer for damages resulting from an on-the-job injury.
Many household employers have a difficult time locating a Workers’ Compensation Insurance carrier who will offer this insurance for caregivers in a private home. HomeWork Solutions has a relationship with insurance professionals who can and will secure this vital insurance.. It is important to secure this insurance at the time of hire as there are no “grace periods” for new employers.
- Household Payroll Taxes: Household employers have payroll tax responsibilities that are similar to those of business employers. Unfortunately, household employers do not typically have a payroll and HR department to provide guidance, advice and services to meet these responsibilities. Additionally, household payroll and domestic employment have many intricate and different rules and regulations as compared to business payroll and taxes that most large payroll companies understand or properly address. For these reasons many household employers turn to companies that specialize in household employment, such as HomeWork Solutions at the time of hire to insure that payroll, tax, insurance and legal matters are properly addressed.
A household payroll expert will help you:
- Define the caregivers wages in FLSA compliant terms: Most privately employed caregivers are classified under the Fair Labor Standards Act (FLSA) as “non-exempt” employees, meaning that they are hourly wage workers. Typically, privately employed caregivers are employed for more than 40 hours in a workweek, and the establishment of proper hourly and overtime wage rates is vital.
- Verify work eligibility (optional): HWS can verify the legal work eligibility of the caregiver via the Department of Homeland Security (DHS) e-Verify system for a minimal administrative fee. This is important added protection for the trustee that insures that the caregiver is legally eligible to work in the U.S.
- Perform statutory new hire reporting to the state.
- Obtain all necessary Federal and state tax identification numbers.
- Obtain workers’ compensation insurance coverage.
- Calculate payroll tax withholdings and estimates of employer payroll tax obligations.
- Process the periodic payroll and distribute pay stubs to the caregiver.
- File and remit quarterly and annual household payroll tax reports and payments.
HomeWork Solutions brings more than 20 years of household payroll and tax experience to assist families, trustees, CPAs, attorneys and Geriatric Care Managers manage the financial and legal relationship they have with privately employed caregivers. Household payroll, as discussed, has many unique and often times intricate laws, specific regulations and exceptions and exemptions that differ from corporate or business oriented payroll. Most payroll companies simply do not understand or handle household payroll issues effectively or efficiently. At HWS we are focused solely on household payroll and domestic employment, it’s all we do, it’s all we have ever done.