Household Employee or Independent Contractor?
The vast majority of
household workers are employees, not independent contractors. For
instance, the IRS has determined that just about all aides,
caregivers, nannies, or other household workers are in fact employees. The
difference between employees and independent contractors hinges on
the amount of control one has over the worker. If the employer has
the right to control what must be done and how it must be done, the
worker is their employee. If only the worker can control how the
work is done, the worker is self-employed. A self-employed worker
usually provides his or her own tools and offers services to the
general public in an independent business.
If that's not clear, then let's try this a different
way.
Do you
pay someone to work in your home such as a home aide,
caregiver, household manager, housekeeper or cook? Will
they earn $1,500 or more this year? If you answered yes
to both questions, then congratulations; you just passed the test for being a
household employer.
Example
1: A family hires Rachel as a caregiver to care for her
elderly mother 4 days a week in their home, for a total of 25
hours. Rachel follows their
instructions about caring, needs and other household duties, and the
family provides the supplies Rachel uses to do her work. Rachel is a household
employee.
Example
2: A family hires Daniel to care for their lawn. Daniel also
offers lawn care services to other homeowners. He provides his own
tools and supplies and he hires and pays any helpers he needs.
Daniel is an independent contractor, not an employee of the family.
Daniel is
responsible for all employment taxes.
A
Real Life Example: Rebecca worked for a family as a
caregiver for
a year. Being paid "on the books" was never discussed. The
family did not withhold taxes from Rebecca’s pay. At the end of the
year, the family gave Rebecca Form 1099 and informed her that she was
an independent contractor, making her responsible for all her taxes
during the year. Although Rebecca was the family’s employee rather
than an independent contractor, she did not know this and paid a
large sum of money in April to cover both employer and employee
taxes. Don’t let this happen to you.
What Types Of Employee Taxes are Withheld?
Let's illustrate the
type of taxes that are paid with a simple example. A family
and a household employee agree to $400 gross wages per week. The nanny is single
with no children and no other sources of income. Assuming she
claims 2 allowances on her, what
is her net pay each week?
|
Employee
|
|
Gross Wages
|
$400.00 |
|
Social
Security & Medicare
|
-30.60
|
|
Federal Income Tax
|
-27.02
|
|
NY
State Income Tax
|
-3.51
|
|
NY Disability
Insurance
|
-4.32
|
|
Net Pay
|
$334.55
|
Note: If the employee is
a New York City Resident, there is an additional
New York City Tax that must be withheld from the paycheck
The
Importance of Talking Gross not Net
When families prepare to negotiate salary, they are afraid of the
unknown taxes to be added on top if they agree to net pay. On
the other hand, nannies/caregivers are afraid of the unknown taxes
that will be withheld from their paycheck if they agree to gross
wages. Thus the gap in negotiating legal compensation.
Always negotiate based on gross wages! Nannies/caregivers are
professionals and as professionals you should negotiate based on the
true value of your worth, gross wages. Also as professionals, you
should insist on being paid legally in order to take advantage of
the many benefits of being legal.
The Tax Process
Household employers are only required
to withhold Social Security and Medicare taxes from your pay. If
both parties agree, employers can also withhold federal and state
income taxes. It is recommended that your employer withhold all federal
and state taxes from your pay. It is easier to administer the
process if all taxes are withheld for you. In addition, it may be
difficult for you to come up with a large income tax payment at the
end of the year.
Now that you’ve made the decision
to "be legal" and have taxes withheld from your gross pay,
we offer
what next?
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