You’ve decided to hire a domestic worker – a nanny, a caregiver, a housekeeper or cook.
Be aware that the IRS categorizes such workers as employees, not independent contractors. That means you are now an employer, with all the responsibilities that entails.
The reason a nanny or another domestic worker is categorized as an employee is that you are in control of how she spends her day. With a nanny, for example, you determine what time she works, where she takes the children and what activities they are allowed. You tell her when to feed the children, and what television shows they can watch. If she were an independent contractor, she could work whenever she wanted, and she would do the job in whatever way she thinks is best.
We’ll explain how to go about hiring a nanny the legal way. Because being an employer means you have a list of responsibilities and laws to comply with. There are ways around the hassles:
- You can rely on a home-care agency to provide a licensed and bonded household worker. In that case, the agency will handle payroll and wages and supervise and monitor the employee. Beware, though: some organizations are simply placement agencies. That means you still bear the responsibilities of an employer.
- You can use a payroll service provider or even a CPA to handle the calculations and paperwork associated with having an employee. Some of the services available include: HomePay, Homework Solutions, SurePayroll and NannyChex.
Here are your responsibilities as an employer:
- Get an employer identification number (EIN). You have to let the IRS know you’re an employer. You can get an EIN through the IRS website as www.irs.gov. And have your nanny fill out a W-4 form for tax withholding.
- Check immigration documents. The worker must fill out Form I-9 (Employment Eligibility Verification) to verify that he or she is legally authorized to work in the United States. If an individual can’t provide proof of eligibility to work, you can’t legally hire that person. You must retain the form; it need not be filed with a government agency.
- Register with the California Employment Development Department (EDD). If you pay at least $750 to an employee in a calendar quarter, you must register as an employer with the EDD.
- Pay taxes. You’re responsible for withholding and paying several taxes:
- Federal income tax. Federal taxes may be withheld at the worker’s request.
- Social Security and Medicare. You and the employee must each pay 7.65 percent of the employee’s wages in Social Security and Medicare taxes. You are also responsible for withholding the employee’s share of these taxes.
- State disability insurance (SDI). If you pay wages of $750 to $999.99 in a calendar quarter, you must withhold SDI from the household worker’s wages and forward it to EDD.
- Federal Unemployment Taxes (FUTA), Unemployment Insurance (UI) and Employment Training Tax (ETT). If you pay wages of $1,000 or more in a calendar quarter, you must pay UI and ETT taxes to the EDD. FUTA is usually 6 percent of the first $7,000 of annual wages paid.
- You need not withhold Personal Income Tax (PIT). However, you are required to report PIT wages for each household employee.
- Worker’s compensation. You must carry a workers’ compensation insurance policy, to assist with medical expenses and lost wages if an employee has a work-related injury or illness. Some renters’ or homeowners’ insurance policies provide such coverage for household employees.
You should file tax forms with the California Employment Development Department (EDD and the IRS on a quarterly basis. Along with the filings, you’ll pay the taxes you’ve accrued as an employer along with the employee taxes that have been withheld.
At the end of the year, you’ll have to file IRS Form W-2 and include a Schedule H form (Household Employment Taxes) with your personal tax return.
Next: Labor law requirements