[IMGCAP(1)]As tax professionals, we’re used to seeing a myriad of changes to the tax code every year. We spend hours familiarizing ourselves with the details so we’re prepared to advise our clients in the New Year.
Now, put yourself into the mind of a family that has privately hired a household employee to provide childcare, senior care, etc., in their home. Without proper guidance, there’s a relatively low chance that they’ll know what aspects of household employment have changed from 2015 to 2016. The good news is that most of the changes are relatively minor, but here are five topics your clients should be aware of:
1. FICA Threshold Increases to $2,000
Every couple of years, the IRS raises the tax withholding and reporting threshold for household employers. In 2016, if a family pays their household employee $2,000 or more throughout the calendar year, they must withhold FICA taxes from their employee and pay a matching portion of FICA taxes—along with unemployment insurance taxes and any other taxes required in their state. This is up from $1,900 last year and is especially important for families with short-term or part-time needs to remember.
2. Department of Labor Further Clarifies Employee vs. Independent Contractor
It's long been clear that the Department of Labor (DOL) and the IRS view the vast majority of domestic workers to be employees of someone—either a staffing firm or the family for whom they work. Recently, the DOL bolstered that stance by issuing guidance on worker classification. Beyond financial and behavioral control, the DOL introduced two new factors—economic dependence and permanence—that tilt the scales even further toward the “employee” designation. For the full breakdown of the DOL’s explanation on this topic, click here. Worker misclassification is considered a form of tax evasion so families need to understand the severity of issuing 1099s to their employees instead of W-2s.
3. Minimum Wage Increases in 15 States
The federal minimum wage of $7.25 per hour hasn’t changed since 2009; however, several states have approved hourly rates higher than the federal mandate. Thirteen states already have higher minimum wage rates than in 2015, and two more—along with Washington, D.C. —will raise minimum wage later in 2016. When two minimum wage rates are present, families need to use the higher of the two rates when paying their employee. This also impacts overtime should the employee work more than 40 hours in a week.
4. The Fine for Not Having Health Insurance Increases Again
We’re now in the third year of the Affordable Care Act’s individual mandate, but you’d be surprised how many questions families still have about the law. Most of the confusion centers on the mandate to provide coverage because most businesses have to aid their employees in some fashion. However, household employers are exempt from this mandate because they are under the 50-employee threshold.
Household employees still need to have health insurance. The fine in 2016 for failing to have a policy is $695 or 2.5 percent of income, whichever is higher. This is up from the greater of $325 or 2 percent of income in 2015. At these levels, some individuals could purchase a policy for the amount they would pay in a fine, so it’s really in their best interest to be covered.
A good place for employees to compare health insurance policies is via the Marketplace at www.healthcare.gov. Additionally, due to their income level, many will qualify for a federal subsidy to lower the cost of their premiums. The catch is, to take advantage of the subsidy, the employee needs to have documented wages, which means your clients will need to provide them with a W-2. This has been a key driver of compliance in the household employment industry over the past year and should continue in 2016. Families have called us to catch up on tax compliance issues just so their employee can have the paperwork necessary to get cheaper health insurance.
5. Federal Mileage Reimbursement Rate Decreases
Very few states require families to pay out mileage reimbursement to their employee if they have to drive while on the job; however, it’s a nice benefit to provide and it’s non-taxable to the family. The federal mileage reimbursement rate for 2016 is 54 cents per mile, down from 57.5 cents per mile in 2015. It covers not only the cost of gas, but also the general wear and tear on the vehicle. Miles driven to and from the worksite do not count towards reimbursement.
Throughout the year, other changes to household employment may occur. The growing Domestic Workers Bill of Rights movement, for instance, is adding labor laws in many states for household employees and it’s possible the state you live in will adopt a bill this year. When families are in the hiring process, they should consult with an expert to make sure payroll and taxes are set up properly from day one.
Tom Breedlove is director of Care.com HomePay, a service that specializes in handling the tax and HR obligations surrounding household payroll.
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