As the Baby Boomer generation ages and faces the prospect of needing to hire caregivers, accountants are increasingly being called upon to help families sort out the tax issues associated with hired domestic help.
While both families and domestic workers can face complex tax issues such as the so-called “Nanny Tax,” there are some tax benefits as well. For example, families are able to reimburse college-attending caregivers for their tuition (up to $5,250) tax-free, according to Care.com HomePay, a service that provides payroll management, tax filing, guidance and support for household employers. According to a recent survey by the company, 80 percent of respondents said they would hire household care for their family from a local college, but only 19 percent are aware of the tax benefits associated with hiring a college caregiver.
Care.com HomePay director Tom Breedlove visited the Accounting Today offices last week and talked about some of the issues faced by household employers and employees. Those include calculating overtime pay, which many domestic workers are entitled to receive but often don’t get. He noted that federal law specifies that all “non-exempt” workers must be paid time-and-a-half for all hours over 40 during a seven-day work week. Fixed salaries are illegal. While federal law exempts live-in employees from overtime law, some states have their own overtime requirements for live-in employees. For example, in New York it’s over 44 hours per week.
There used to be an exemption for so-called “companions,” but starting on Jan. 1 of this year, third-party caregivers can no longer be categorized as companions. Overtime pay thus applies for companions unless the caregiver is directly employed by the family.
“The repeal of the companion care exemption is making waves in the senior care world,” said Breedlove.
He noted that back in the 1970s, anyone providing companionship for seniors did not need to get overtime. But the Department of Labor gradually narrowed the definition of “companion” and said if a caregiver works for a third party, they have to get overtime. The home care industry appealed, but the Labor Department eventually won a unanimous decision at the appellate court level. Breedlove predicted that as a result of the changing landscape, there will be a gradual move toward private employment of caregivers by households, rather than going through third parties.
His service works with accountants on behalf of families and caregivers, sending payroll notifications and tax returns to accountants, giving them the ability to manage the relationship. His service has also created a “getting started” packet for accountants, including sample employment letters.
Caregivers and families frequently need to turn to accountants when they get in trouble with the Internal Revenue Service or labor regulators. It is still all too common in the domestic worker industry for household employees to be paid “off the books” or “under the table,” since the various pay and tax requirements can be onerous for many families. Breedlove pointed out that many domestic workers focus solely on their take-home pay and don’t care what their household employer needs to do in the way of payroll taxes and overtime to get to the level they specify. To simplify matters, many families get in the habit of paying the worker informally, but that can be a problem when it comes time for the worker to retire and they don’t have money put aside in a retirement account or reported to the Social Security Administration.
And there are tax benefits available to household employees and families besides the tuition benefits mentioned above. IRS Publication 503, on child and dependent care expenses, lists a number of them. Form 2441, for claiming the Child and Dependent Care Tax Credit, allows families to itemize up to $3,000 per child per year, up to a maximum of $6,000 for two or more qualifying children. Most families will see a 20 percent tax credit and save $600 or $1,200 per year, according to the company, depending on the number of children.