A recurring question to our client support staff concerns whether a family can treat their nanny (or other household staff) as an independent contractor, provide the nanny a 1099 Form instead of a W-2, and avoid the entire issue of payroll taxes.
If you answer YES to all of the following questions, the nanny or household worker IS your employee:
The household worker provided services in your private home -or- another private home as part of a nanny share arrangement.
You paid the household worker $2000 or more for services in the year.
The household worker is 18 years or older.
A household employee must be provided a Form W-2 – only true independent contractors are provided a 1099 form. There is no nanny independent contractor – you always have the right to control her work.
To qualify as an independent contractor, the worker must show factors that indicate true independence, such as being able to determine when (days or time) and where work is performed, to work for others and provide their own equipment. An example of a household independent contractor is a gardener who comes to the home as needed or on a flexible schedule, bringing his own lawn equipment. Additionally, an independent contractor is free to bring their own helpers, or to have some or all of the work done by others, without consultation with the household.
Improperly treating a household worker as an independent contract for tax and insurance purposes is a practice known as “Employee Misclassification” and the US Department of Labor, the IRS and 33 states are working together to crack down on this illegal practice. Wage and hour complaints and unemployment claims are two common actions that brings misclassification to the attention of authorities.
Video: Employee or Independent Contractor?
Nannies, housekeepers and elder care givers privately paid directly by the family are almost always employees of the families they work for. Common law (not the tax code -or- your written work agreement) makes the determination of when an employer/employee relationship exists. Under common law, a worker who performs services for you is your employee if you can control the work schedule, what will be done and how it will be done. It does not matter whether you give your nanny or caregiver great latitude, but rather that you have the right to control the work. It does not matter if the work is performed on a full time or part time basis. It does not matter whether the worker lives with you or not. It does not matter if he/she is paid hourly, daily or a salary. It does not matter how the employee refers to herself or how you refer to him/her in an employment contract. The IRS articulates strict guidelines that differentiate employees and independent contractors to further eliminate confusion (Refer to IRS Publication 926). Nannies, elder care givers, maids, housekeepers and other domestics are generally considered employees. You are generally obligated for all payroll tax filings and remittances if you pay the worker $2000 or more in the calendar year (2016).
The IRS reaffirmed this stance twice in 1999. In two private letter rulings (PLR 199923014 and 199923015) the IRS disregarded a written contract’s designation of a worker as a contractor, ruling that the substance of the relationship and not its label determines the worker’s status. More recently, the Kentucky Supreme Court ruled that an employment contract was “nothing short of legal fiction” when it “attempts to create independent contractors out of workers who clearly are not engaged in independent businesses.” (Unemployment Insurance Commission v. Landmark Community newspapers, 2000-SC-0884-DG 12/19/02)
If you engage a nanny or other care giver whom you do not pay directly – you pay an agency for example – and the referring agency establishes the scope of work, the care giver’s pay rate, the agency pays the care giver, and even determines which care giver to send to you, you will generally not be considered the employer of the agency personnel and you will not have payroll tax obligations. However, if the agency is not paying the payroll taxes and the employee files a complaint, you may be deemed a CO-EMPLOYER and as such be responsible for taxes. It is very important that you clearly establish, before engaging the agency, that they are the employer – look for it in writing. As a practical matter, this scenario happens most often with home healthcare workers, and very rarely with nannies, doulas and temporary babysitters.
Certain professionals such as physical therapists, occupational therapists and speech therapists who come to your home to provide specialized professional services for you or your dependent will generally be treated as independent contractors and carry their own insurance and pay their own taxes.
You are also NOT required to pay employment taxes on the monies paid to the following individuals for childcare or domestic services:
Your child under the age of 21
Your parent UNLESS the parent provides care for your child 17 or younger or an adult household member who has a physical or mental condition that requires personal care AND your are a) divorced and not remarried or b) a widow or widower or c)you are living with your spouse whose physical or mental condition prevents him/her from caring for your child(ren).
Any person aged 17 or younger who is a student.
You are also not required to pay Social Security and Medicare taxes for a household worker if the total cash wages paid does not reach the annual wage threshold, currently $2000 per year. (2016)