[IMGCAP(1)]If you’re like most tax professionals, you probably have a few clients with household employment situations. As you know, household employment is quite different from commercial employment different forms, processes, deadlines and labor laws. Families with domestic employees struggle with all the state and federal obligations and, as a result, many make inadvertent mistakes that can become very expensive and frustrating.
To prevent these problems for your clients, here are some helpful tips you may want to share.
1. A domestic worker is considered an employee, not an independent contractor. This is easily the most common mistake seen in the household employment industry. IRS Publication 926 clearly states that nannies, senior caregivers, housekeepers and other domestic workers are employees of the family for whom they work. Unfortunately many families are bombarded with misinformation and believe they can simply provide their household employee with a 1099 at tax time and save themselves the burden of handling employment taxes. Worker misclassification is considered tax evasion and punishes the worker in the form of higher taxes. As a result, it’s being aggressively enforced by the IRS and the Department of Labor.
2. During the hiring process, illustrate the difference between gross and net pay. While there is significant momentum building toward household employment tax compliance, many domestic workers are still used to being paid under the table in cash. So when they work for a family that wants to pay them legally, it’s important that the worker understands how tax withholdings work and how much will actually end up in their bank account. It would be wise to run a few payroll scenarios to illustrate the difference between gross wages and net pay during the compensation discussion at time of hire. This will help your clients prevent any surprises on the first payday.
3. Household employees should be paid an hourly rate and overtime. Many of your clients are probably used to being paid a salary, but their household employees are classified in the Fair Labor Standards Act as non-exempt workers. This means their payroll should be set up on an hourly rate for every hour worked. If you client knows their employee will work a set number of hours each week, they can offer a weekly “salary,” but they should translate this amount into an hourly rate in their employment contract so fluctuations in their employee’s hours can easily be calculated and detailed on paystubs.
Because household employees are non-exempt workers, they also must be paid overtime if they work more than 40 hours in a seven-day workweek. Overtime should be paid at least 1.5 times the regular hourly rate and should be spelled out in the employment contract. The Domestic Worker Bill of Rights laws passed in California, Hawaii, Massachusetts and New York over the past few years have heightened awareness of overtime rights, making it more important than ever for your clients to stay compliant and prevent any potential wage disputes.
Note: Federal law exempts household employers from paying overtime to live-in employees, but they must be paid for every hour they work. Additionally, several states have laws on the books to extend overtime to live-in employees or have daily overtime requirements, so it’s important your clients understand the specific requirements in their state.
4. Think about paid time off, holidays and sick time for the employee. While federal law does not require your client to provide paid time off for vacations, holidays or sick time to a household employee, it’s an important benefit to provide if your client wants to attract and retain a high-quality employee. Additionally, several states and municipalities have paid time off or sick time requirements, so it’s crucial that your clients build these details into their employment contract.
5. Don’t procrastinate! To families, the “nanny tax” obligations seem like “tax stuff” that can wait until “tax time.” However, most states have wage reporting obligations throughout the year. Additionally, employers must withhold FICA taxes from the employee or they become liable for them. Waiting until tax season to address these issues as well as all the labor law issues usually results in mistakes and added expense. It’s much cheaper and easier to handle all this at the time of hire.
You may see more household employment questions this year than you have in the past. The Domestic Worker Bill of Rights has brought attention to legal pay among workers across the country. Additionally, many domestic workers qualify for the federal health insurance subsidy, but they must have documented wages in order to realize that benefit. We’re anticipating that many caregivers will be approaching their family about these issues and families will then turn to their trusted advisors to help them handle things correctly and eliminate risk.
Tom Breedlove is director of Care.com HomePay.
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