The IRS is more strictly enforcing rules that determine whether a worker is actually your employee, rather than an independent contractor. Beware: you have many extra tax responsibilities and expenses if you are an employer in the eyes of the IRS.
So, be careful if you regularly pay a gardener, housekeeper, nanny, babysitter or any other household service provider. You don't want to run afoul of the IRS household employee rules, often called the "Nanny Tax."
Do you have a household employee?
Many taxpayers unwittingly establish an employer relationship when they hire someone to help around the house. To decide whether a household worker is your employee, the IRS looks at whether you:
- Control how and when their work is done.
- Provide them with supplies and equipment.
The IRS also considers whether the relationship is permanent, and whether a worker is economically dependent on their employment with you. A worker may be considered an employee whether or not their work for you is part- or full-time, or paid hourly, weekly or by the job.
Tip 1: The more independent the worker is, the less likely they are to be considered your employee. Have your worker set their own hours and use their own tools. Also have them invoice you for their work and provide you with receipts.
Tip 2: If the worker works for another company that issues them a W-2, or they run their own company that offers services to the general public, you are generally safe from having them considered as your employee.
Tax Consequences
If you think you have a household employee, here is what you need to know:
The $2,100 limit. If you pay less than $2,100 in a year (or $1,000 in any calendar quarter) you generally are not responsible for paying employment taxes. But if your payments are over these limits you may need to withhold and pay Social Security, Medicare and unemployment insurance taxes.
Overtime. You may be required to pay overtime, depending on federal and state laws.
Timing is important. Employment taxes must be paid regularly throughout the year or you could be faced with fines and penalties.
Other considerations. You may also need to purchase worker's compensation insurance to cover you should there be any accidents while they are working for you.
If you are going to rely heavily on the services of a domestic worker, it’s worth thinking carefully about the relationship at the outset. Consider getting a formal employment contract in place, and call for help to create a plan to handle your tax obligations.
As always, feel free to pass this Tip along to friends, and reach out if you need help with your personal tax and finance situation.