Leta Collie, CPA
Senior Manager, Technical Tax Services
As the United States’ population ages, many elderly individuals are opting to remain in their homes with the assistance of home health aides, certified nursing assistants or other in-home caregivers as an alternative to residential assisted-living facilities. If you or a loved one is considering hiring an in-home caregiver, nanny or other domestic employee, there are tax and labor law compliance issues to consider.
A threshold issue is whether the caregiver is eligible to work in the United States. Valid work authorization is required for both domestic employees and household independent contractors. A domestic worker such as a caregiver or nanny typically would be classified as an employee rather than an independent contractor because the cared-for person (or the parent) directs the caregiver’s work and otherwise has the right to tell the caregiver what needs to be done and how to do it.
Federal and State Tax Law Compliance
The employment of a domestic employee requires Federal and FICA withholding and often State income tax withholding. Many states also require the employer to pay State Unemployment contributions for wages earned by a domestic employee. The individual or family employing a domestic employee must collect and remit the employee’s federal and state withholding tax obligation. Like any other employer, the employing family must match the employee’s social security and Medicare tax obligations. Household employees are also subject to federal and state unemployment taxes. Most states require quarterly state unemployment returns.
The employing person or family must make estimated tax payments and furnish the employee with a Form W-2 by January 31, 2017. The employer will report the federal income taxes and FICA withheld, and unemployment contributions paid for the domestic employee on Form 1040, using Schedule H, Household Employment Taxes.
If an individual acts as a sole proprietor employing an in-home caregiver, then the sole proprietor may report the employee on an employer’s federal tax and unemployment return, rather than report these items on Schedule H of the Form 1040. The sole proprietor would also file an Employer’s Annual Federal Unemployment (FUTA) Tax Return (Form 940) and the appropriate Employer’s Federal Tax Return (either Quarterly Form 941 or Annual Form 944).
Minimum Wage and Overtime Protections Under the Fair Labor Standards Act
In-home employees are protected by the minimum wage and overtime protections of the Fair Labor Standards Act (FLSA) as “domestic service employees” when they do not reside with the employing individual or family. A domestic service employee that lives with the employer is exempt from the overtime rules of the FLSA, but not the minimum wage provisions. Domestic service employees do not qualify for the “white collar” exemptions from the FLSA’s minimum wage and overtime rules, even if an employing family pays them at or above the FLSA-exempt salary level.
Paid Sick Leave Requirements
Many states and localities are adopting paid sick leave laws and ordinances that could potentially cover domestic workers. For example, in California, beginning July 1, 2018, in-home support service workers who work 30 or more days in the state during a year of employment are entitled to one paid sick day. These workers are entitled to second and third paid sick days in conjunction with California’s phased-in minimum wage increases over the next several years.
Worker’s Compensation Insurance
Worker’s Compensation Insurance coverage for domestic workers is not required under state or federal law. It may be a sensible choice; in-home caregivers to elderly persons suffer higher rates of workplace injury than many other types of employees.
A Final Reminder
Please remember that paying an employee “under the table” is illegal. Families that pay under the table cannot claim a deduction for the child and dependent care expenses on such payments. Individuals that skirt the law could be required to pay federal and state employment taxes and penalties. They also open themselves up to exposure for failure to comply with labor laws. Contact us if you have questions regarding your tax and payroll obligations.