| Mistake #1: Misclassifying the worker as an | | | | take the tax breaks associated with those wages |
| independent contractor. | | | | -- but it must be handled on the personal income |
| If you hire someone to work in your home, the | | | | tax return. |
| IRS considers that person to be your employee. | | | | Based on this same logic, it is considered insurance |
| Classifying the worker as an independent | | | | fraud to put a household employee on the |
| contractor (by using Form 1099) is considered tax | | | | company's group health plan. |
| evasion. Beware: the IRS recently announced a | | | | Mistake #4: Failing to properly withhold and report |
| major enforcement initiative targeting several key | | | | payroll taxes. |
| industries, including household employment. | | | | Household employers are required to administer |
| Mistake #2: Failure to properly address overtime. | | | | the payroll tax withholding and reporting process: |
| Nannies and other household employees are | | | | 1. Establish household employer tax IDs with the |
| considered non-exempt workers under the Fair | | | | proper state and federal tax authorities; |
| Labor Standards Act. That means their employer | | | | 2. File a New Hire Report with your state (usually |
| is required to pay overtime for all hours over 40 | | | | within 14 days of the employee's start date |
| in a 7-day work week (live-in nannies are generally | | | | although some states mandate the report be |
| an exception to this rule, although a few states | | | | done within 7 days); |
| require live-ins to be paid overtime as well). | | | | 3. Calculate the proper tax withholdings each pay |
| Overtime hours must be paid at a rate that is at | | | | period and keep track of the totals (Social |
| least 1.5 times the regular rate of pay. | | | | Security is 6.2%; Medicare is 1.45%; federal and |
| Many families try to side-step overtime by | | | | state income taxes are based on the employee's |
| offering a salary. In their minds, jobs that pay a | | | | Form W-4 selections; other employee taxes vary |
| salary -- instead of hourly -- are legally able to | | | | by state) |
| pay a fixed amount of wages regardless of how | | | | 4. File quarterly tax returns with the state and |
| many hours the employee works. This is true in | | | | remit the employee's state taxes along with your |
| most "white-collar," "highly-compensated" | | | | employer state taxes (i.e. unemployment) |
| professions because workers in these types of | | | | 5. File 1040-ES returns with the IRS and remit the |
| jobs are not prone to abuse. In the case of | | | | employee's federal taxes along with your |
| household workers, however, employers must | | | | employer federal taxes (i.e. Social Security & |
| make sure to properly address overtime pay. | | | | Medicare match) |
| Note about overtime: If the worker and employer | | | | 6. At the end of each tax year: |
| agree to a salary based on a schedule that | | | | 6a. Prepare Form W-2 for any and all employees |
| regularly includes more than 40 hours, the family | | | | who had wages during the year. |
| should protect themselves by addressing | | | | 6b. File Form W-2 Copy A and Form W-3 with |
| overtime in an employment agreement that is | | | | the Social Security Administration. |
| signed by the employee. For example: Family and | | | | 6c. Prepare Schedule H and include it with your |
| nanny agree to $450 per week based on a | | | | personal federal income tax return. |
| 45-hour work week. The employment agreement | | | | 7. Monitor ever-changing tax and labor law and |
| should specify that the weekly compensation was | | | | respond to notices, alerts and inquiries from the |
| calculated based 40 hours at the regular rate of | | | | state and federal tax agencies. |
| pay $9.47/hr plus 5 hours at the overtime rate of | | | | Mistake #5: Failure to secure workers' |
| $14.21/hr. Additionally, it must be stated that any | | | | compensation insurance. |
| hours over 45 in a work week will be paid at the | | | | Workers' compensation insurance provides |
| overtime rate of $14.21. | | | | financial assistance with lost wages and medical |
| Overtime issues are particularly dangerous for | | | | costs in the event that your employee becomes |
| employers because there is no statute of | | | | injured or ill as a result of the workplace or job |
| limitations. So former employees can file a wage | | | | duty. It is not required for household employers in |
| dispute many years after the relationship has | | | | all states (check your state or our website for a |
| terminated. Back wages plus back taxes, penalties | | | | listing of requirement thresholds by state). If you |
| and interest can make this a very expensive | | | | are required to carry a workers' compensation |
| mistake. The good news is a simple employment | | | | policy -- or if you elect to carry one -- check with |
| agreement makes all the worries go away. | | | | your homeowner's insurance provider first. Many |
| Mistake #3: Putting a household employee on the | | | | umbrella policies already include coverage for |
| company payroll. | | | | domestic workers. |
| Household employees are not considered direct | | | | Note about workers' compensation: A few states |
| contributors to the success of a business. And | | | | (i.e. New York, New Hampshire, and Ohio) require |
| since businesses are entitled to tax deductions on | | | | that policies be obtained through the state. |
| payroll expense, it is an illegal tax deduction to | | | | BONUS: When you successfully navigate these |
| include a domestic worker's payroll expense as | | | | potentially-expensive problem areas, you are |
| part of the company payroll and tax reporting. | | | | entitled to one or more significant tax breaks and |
| Instead, it should be handled separately through | | | | your employee receives many critical benefits and |
| the household employment reporting process. If | | | | protections. |
| the expense is childcare related, the family can | | | | |