Helpful Advice on Taxes and Benefits
Tax withholding and benefits administration are often among our clients' greatest administrative concerns. Unfortunately, it appears that there is good reason for alarm. The IRS reports that as many as 90% of household employers file their employer taxes improperly, opening themselves to potential fines or audit risk.
For this, we encourage clients to consult IRS Publication 926 Household Employers Tax Guide or a qualified tax professional. Additionally, we can make recommendations regarding domestic tax and payroll services.
We are pleased to provide essential information to build your base of knowledge on the topic. The most common points of misunderstanding surround employment status and the wage and overtime rules.
Employee v. Contractor To simplify administration, some families and domestic staff choose to engage in a client / vendor relationship, with the worker filing income as a 1099 independent contractor. The perceived benefit to the family is that the worker is theoretically treated as an outside self-employed proprietor, responsible for her own taxes and insurance. The family just “pays the bill”.
Unfortunately, the decision as to whether or not the worker may file as a contractor is not at the family or employee's discretion. Independent contractor status is defined by the nature of the relationship, and rarely do domestic work arrangements qualify unless the worker can demonstrate sufficient independence and expertise. For example, does the worker have a license, business card, multiple clients, freedom to perform his or her duties and authority to make decisions without the family’s involvement or supervision? Does the worker use his or her own equipment to perform the work?
Rarely are these requirements met completely, and if the worker or family is ever audited or the worker ever files for unemployment or social security benefits in the future, the nature of employment may be reviewed and corrected, with penalties levied on both parties.
Wage and Overtime While the term “salary” is commonplace in the industry, it is worth noting that all domestic employees, regardless of role or responsibilities, are considered hourly workers, non-exempt from the overtime provisions of the Fair Labor Standards Act. As such, all live-out employees are entitled to overtime at a rate of one and one half times their regular rate of pay for all hours worked in excess of 40 hours each week. And, all live-in employees are entitled to straight pay for all hours worked in excess of 40 hours each week (with a few exceptions, for example in New York, live-in employees are entitled to time and a half after 44 hours).
While we do not enforce the tax rules, we do our best to inform clients so they make the best decisions for their situations. We also offer to assist with work agreements and other new hire paperwork to get employers and employees off to a positive start based on a clear understanding of their compensation.
For clients interested in establishing a weekly salary, consider stating in writing how many hours you are paying for with that salary, calculate the hourly equivalent of their regular rate of pay, and state the overtime rate for hours worked in excess of 40 hours (or 44 for New York live-ins). You may also want to establish a daily or overnight rate for vacations or unique circumstances. Just be sure that the computed pay is in excess of the federal and state minimum wage.
Social Security and Medicare Taxes (FICA) If you pay a household worker $1,700 or more in wages in 2009, you must pay and deduct Social Security and Medicare (FICA) taxes and report the wages once a year. This includes reporting any cash you pay to cover the cost of the employee’s transportation, meals or housing. If you do not report the wages on time, you may have to pay a penalty in addition to the overdue taxes.
Generally, employers are responsible for paying FICA taxes totaling 15.3% of the employee’s cash pay. The employee is responsible for half of that amount, 7.65% (which you must withhold and pay on the employee’s behalf), and the employer is responsible for a matching 7.65%. Alternatively, you may choose to pay both the employee and the employee’s share. For more information, visit the Social Security Administration’s publication on Household Workers.
Income Taxes In addition to FICA and Medicare taxes, employees must also pay federal and, where applicable, state income tax. According to the Internal Revenue Service, you are not required to withhold federal income tax from wages you pay a household employee. They advise you to withhold federal income tax only if your household employee requests you do so and you agree. The employee must give you a completed Form W-4, Employee's Withholding Allowance Certificate.
State and Federal Unemployment Taxes (FUTA) Employers of domestic employees must also pay state and federal unemployment taxes if they pay wages to household workers totaling $1,000 or more in any calendar quarter of the current or preceding year. The Department of Labor defines a household worker as an employee who performs domestic services in a private home, local college club, or local fraternity or sorority chapter. You can find more information on Federal Unemployment Tax (FUTA) on the Department of Labor’s Website.
Not every state requires state income tax, and a state’s unemployment insurance rate can vary. Check with your state’s Department of Labor to determine if your state has income tax and what unemployment taxes are required.
When you hire a household employee, it is important to discuss which taxes are being withheld.
Workers’ Compensation and Disability Insurance Like unemployment insurance, rules governing worker’s compensation and disability insurance vary by state. About half of the states in the U.S. require some form of coverage for full time employees, including New York and Connecticut. Other states make coverage voluntary, but we encourage you to consider coverage to minimize your risk exposure in the event of an accident. Check your local Department of Labor for details. The insurance is generally not cost prohibitive and can be arranged through a state-sponsored insurance fund.
Employment Practices Liability Insurance (EPLI) Employment practices liability coverage is not very common in the domestic employment arena, but if you employ a large staff, you should consult your insurance agent for details. This coverage should help offset the cost and risk of an employment-related claim pertaining to such situations as discrimination, sexual harassment, wrongful discipline, or wrongful termination.
As with most jobs, employees expect time off for vacation, holidays and illness. Some employers even provide health insurance and other benefits. How you handle it is up to you, depending on your household’s needs. At the time of the interview, be sure to discuss your policies and even put them into writing to avoid future confusion.
The Lindquist Group offers the following counsel on benefits:
- Vacation: The standard is two weeks. Some people offer their employees a week of vacation after six months, and another week at the end of one year of employment. You also may require your employee to take one week of vacation when the family takes its vacation, and the other week at his or her discretion.
- Holidays: Most household employees get all major American holidays off, like New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. Your employee may wish to negotiate other days as well as certain religious holidays.
- Sick days: If your Nanny or Housekeeper has a bad cold or other highly communicable illness, you most likely do not want her around your family. Paid sick days are an incentive to stay away and recuperate. Some employers provide up to five paid sick days a year. Base your policy on your generosity and ability to identify temporary assistance for sick employees.
- Health insurance: Many household employees do not have health insurance, so this may be an added incentive for hiring. If you decide to provide this to your employee, you may elect to split the premium with him or her, or offer it instead of a higher salary.
- Disability insurance: Disability insurance is often overlooked in the domestic arena, however it provides compelling, cost-effective benefits to employees in the event they become injured or ill to the point of being unable to work.
Other things you may wish to provide:
- Car insurance
- Health club membership
- 401(k)/retirement plan