After hiring a nanny or senior caregiver, families often turn to Certified Public Accountants or other tax preparers with questions about what to do next. “How do I handle payroll,” and “Do I have to pay taxes,” are common questions.
As an experienced professional in accounting, you may be well-versed in household employment taxes (commonly referred to as "nanny taxes") and have likely assisted many families in filing as part of your personal income tax practice. However, also understand that relying solely on IRS Publication 926 for federal household employment tax reporting is not sufficient. Most families lack the expertise, time, or inclination to research and understand all the rules and overtime laws that may apply to them.
To help your clients avoid common mistakes, you can instill in them the crucial importance of having a caregiver's compensation agreement. By addressing these matters upfront during the hiring process, families establish a professional employment relationship with their caregiver and minimize the risk of costly wage disputes in the future. Having clear expectations to which both parties agree is essential. Here are some other tips learned from our more than 30 years of experience:
State wages in gross pay terms
Some household workers have never worked as legally paid employees and have little understanding of payroll taxes. It is common for caregivers to state their salary requirements in terms of net wages or “take-home” pay. Unfortunately, this may result in a mismatch of expectations between your client and the caregiver. Your client should take the time to explain the wage offer and the taxes that will be deducted from the paycheck. You can suggest they reach out to a household payroll company that can prepare a sample paycheck calculation and go over it in detail.
Provide detailed payroll tax deductions
As a household employer, your client is responsible for Social Security, Medicare, and unemployment taxes. However, they are not legally required to deduct income taxes from their caregiver's wages. Opting to not withhold income taxes does not mean the caregiver will not have an income tax burden. Be sure employees know how to make estimated tax payments if needed. Employers should always provide a pay stub with each paycheck, clearly itemizing wage calculations and tax deductions. Caregivers who have been paid "under the table" in previous jobs may need additional support to understand this process, b
Pay by the hour and account for overtime
The Fair Labor Standards Act (FLSA) classifies household employees as non-exempt workers, meaning they are hourly employees who must be compensated for every hour worked. While many families offer a fixed weekly wage, it is crucial to document this wage at its proper hourly rate, including an overtime rate if required. Any extra hours worked outside the weekly guaranteed schedule must also be compensated. Offering compensatory time or “banking hours” is illegal. A work week is defined as a fixed 7-day period, and hours exceeding 40 must be paid at the overtime rate in compliance with federal laws. Additionally, certain states also have daily overtime rules which must be observed. Specific state household tax and labor requirements can be viewed on our free state tip sheets.
State regulations are increasingly expanding domestic worker rights and protections. Household employees in certain states, such as California, Hawaii, New York, Maryland, Massachusetts, and Minnesota, have workplace rights that go beyond federal standards. Many other states are considering proposals to expand domestic worker rights. National labor law enforcement has also become more stringent, encouraging household employees to file wage and hour grievances if they believe their payroll is not being calculated properly.
Also note that while federal law does not mandate overtime differentials for live-in caregivers, they must still be paid their hourly rate for every hour worked. Many states have stricter standards, and your clients must adhere to the rules and regulations of their respective state.
Document paid time off, including sick leave and holiday pay
According to federal law, household employers are not obligated to provide any paid time off for vacation, sick leave, or holidays to their employees. Nevertheless, most household employers offer some basic paid time off to attract and retain quality workers. Additionally, state and local ordinances exist across the country to establish minimum paid leave benefits for household workers. If your client wishes to pay for specific federal holidays, these should be clearly identified in a written compensation agreement. Family policies for vacation and sick pay, including accrual rates, should also be outlined, preferably in terms of hours rather than days or weeks.
Get ahead of the curve
Clients often wait until tax time to inform you they have hired a household employee, While you may be able to handle their federal household payroll tax requirements at that time, it may be too late for state requirements such as new hire reporting, quarterly unemployment tax filings, and workers' compensation insurance. These should be addressed at the time of hire and in accordance with state filing requirements, not months later during tax season.
To avoid such scenarios, we recommend including a friendly reminder in your periodic communications to your clients. Encourage them to contact you immediately if they hire a domestic employee, rather than waiting until tax season so you can help them set up their obligations correctly from the start.
If your firm does not handle household payroll, it is advisable to refer your clients to a trusted partner that specializes in this area. A household payroll service like HomeWork Solutions can assist your clients with expert advice at the point of hire, addressing all the issues mentioned above and more. We can save you time and valuable resources during tax seasons. Your clients can add you to their HomeWork Solutions account, granting access to a pro forma Schedule H and a summary of tax payments, even before they get you their dreaded tax organizer.
Reach out to our team of household payroll specialists to learn more about how HomeWork Solutions can help you and your clients simplify!