If you have recently hired a nanny or caregiver, it is important to classify their employment legally. Clients often ask whether they can pay their employee as an independent contractor and avoid the hassle of payroll taxes. The simple answer is no. This misclassification is very common, and carries costly risks to both the household employer and to the worker. There are some big differences between an employee and an independent contractor.
In the eyes of the law, you have an employee if:
- You control the work schedule
- You designate the job duties and how they are completed
- You determine where the work is done
Hiring an employee means that payroll taxes are your responsibility. If you pay a household employee more than $2,400 in wages in a calendar year (2022), then you are a household employer and are required to remit social security and Medicare taxes, federal unemployment tax, and state unemployment and disability insurance taxes. If you pay your employee ‘off the books’, you could face hefty fines or penalties. To avoid willful misclassification, the Internal Revenue Service has entered into information sharing agreements with more than 30 states to ensure legal pay is enforced.
It is advisable to speak with a household payroll and tax specialist to determine how to withhold employee taxes, and remit both employer and employee taxes properly. These wages and withholdings will be accounted for on the employee’s W-2, and the employer’s Schedule H on end of year tax filings.
In the eyes of the law, the worker may be an independent contractor if:
- The worker provides similar services to other households, and is not financially dependent on the services they provide in your home
- The worker controls their work environment, including their schedule, potentially even providing their own equipment and supplies
- The worker can send in a qualified substitute worker without preapproval
Independent contractors are considered self-employed and are responsible for their own payroll taxes. They adhere to a different set of rules and regulations surrounding taxes and payments.
Still not sure if your newly hired worker is your employee, or an independent contractor? We understand that there is a lot to learn, especially if you’ve never paid a household employee before. The experts HomeWork Solutions know the innerworkings of the various tax and labor laws surrounding household employment. We will answer your questions and help get your taxes and payroll in order, so you don’t have to worry. Contact our experienced team today at 1-800-626-4829 or firstname.lastname@example.org.