Avoiding running afoul of the tax man when you hire a caregiver
The IRS considers tax evasion a serious problem–so much so that the IRS and the Department of Labor (DOL) have announced enhanced enforcement and collection efforts with one of their primary targets being domestic employment. Let’s back up a moment and look at how you could possibly be an employer without realizing it and then what you do about it.
First, how do you know you have hired an employee? Say that Mom needs a bit of help around the house. Maybe she needs someone to do the heavier housework, drive her to the doctor and the grocery store and provide some companionship. As a result, you hire someone to come in for a few hours every day. Did you hire someone through a home health agency? It’s important to ask that agency if they file taxes for their caregivers. If the answer is yes, you have no liability when it comes to reporting or remitting any taxes so you’re okay and that would be the end of this story. If instead the answer is that you are responsible for taxes or you hired someone who “works for themselves,” you have hired an employee.
You might ask yourself why your new employee isn’t an independent contractor rather than an employee. That’s a common mistake. An independent contractor might put a new roof on your home or do lawn maintenance but the law determines a worker’s independence by the use of a test. That test examines how much control the employer has over the worker. If you have the right to determine who cares for your mom, how that person performs the job, when that person works, in other words if you have control over an individual’s work environment, you are the employer because ultimately you call the shots. An independent contractor, by contrast, is hired to complete a specific task and gets to make the decisions necessary for completion of that job, the task is limited in scope and is as needed.
As mentioned before, not filing correctly is considered tax evasion. Tax evasion comes with back taxes and penalties. You have four primary tax duties if you hire an employee.
- You must withhold Social Security and Medicare taxes from paychecks each pay period. You are not required to withhold Federal Income tax but doing so protects your employee from a large tax burden at the end of the year.
- You must file tax forms with the Washington Employment Security Department and with the IRS on a quarterly basis.
- You must pay the employer’s portion of Social Security and Medicare as well as federal and Washington unemployment insurance taxes as well as a small employment administration fund tax.
- You must prepare a W-2 at the end of each year and distribute it to each employee. You must also file Form W-2 Copy A and Form W-3 with the Social Security Administration and file Schedule H with your personal income tax return.
You can find a tax and labor summary for the state of Washington here.
In addition, if your employee becomes injured while working for you, you’d be held liable for any costs related to an injury including medical expenses and disability payments.
Gotcha 1: For families that have a small business, it might be tempting to put your caregiver on the company payroll. This would allow you to make use of procedures that are already in place but alas there’s a problem. The first is that businesses take tax exemptions for employees so the language of the law requires those employees to be “direct contributors” to the success of the business. The IRS has ruled that caregivers are not direct contributors and thus has determined that taking deductions for a caregiver constitutes an illegal tax deduction. It is also illegal to put a caregiver on the company’s insurance plan.
Gotcha 2: Household employees are considered non-exempt and are therefore entitled to earn overtime pay for all hours over 40 hours in a seven-day work week. There are two exemptions to this. You can hire live-in employees in some states without paying overtime and employees that provide companion care are exempt (but the rules for this are going to change in 2015). There are likely additional changes in the works as some states are looking at and passing domestic workers bill of rights.
Why would anyone choose to hire a caregiver independent of an agency if all these rules apply? By the time you hire a caregiver legally, you may not save any money. Therefore, the benefit lies in the degree of control you have over the situation. You might already know someone that you trust who would be a great fit for your mom, or you may just like the control that comes from knowing that it’s easy to get rid of someone you don’t like or to hold onto someone that you do like. Depending upon the agency you hire, some chores you might want done can run outside of the agency’s scope and they won’t perform them. It’s important to weigh the benefits of one over the other and if you decide you want to hire an employee rather than a firm, get advice from a good elder law attorney on how to proceed. You can also find accounting firms that will help small employers with the tax and financial obligations you incur when you hire an employee. An elder law attorney can help you find help there as well.