If you employ a household worker, for example, a caregiver or a housekeeper in your home, do you know how to avoid tax trouble? The IRS and several states are turning up the heat to make sure that in-home workers are paid fairly, and that you as the employer are not failing to pay the necessary tax.

Paying “under the table” may sound like a good idea, but compared to the hot water you could get into if you are found out, compliance is a better idea. One very common way that people get caught paying under the table is a simple misunderstanding. That is, you no longer need your worker, lay him or her off, and the worker files for unemployment, not realizing that you have not paid into the unemployment system. The government takes a look, and you’re busted. Also, the law is making it easier for disgruntled home workers to file and win legal disputes. And while you’d have to pay an attorney, your home worker would likely get free representation if you fail to follow the law.

What Exactly is a Household Employer?

Even if you only have a caregiver, maid, nanny, or other worker in your home for a few hours a day, if you control the work done (when, where, how, and by whom), you’re probably an employer in the eyes of the government.

If you’re an employer, then you have tax obligations if you pay one individual $2,000 or more in one calendar year. If you pay $1,000 in a quarter to one employee, you may need to pay federal unemployment tax, and possibly state unemployment. Ask your accountant for details. This does not apply to wages paid to your spouse, parent, or your child who is under 21.

Employers Must Withhold Payroll Tax

Payroll tax is equal to 15.3% of your employee’s gross pay. As the employer, you must pay half of that (7.65%) and you must withhold a matching amount from your worker, and send it to the IRS at specific times. What if you don’t withhold? Then you owe the entire amount. In addition:

• Your worker may also want you to withhold income tax for federal and state income tax. He or she must fill out a W-4 form which governs how much to withhold.
• You’ll also need to file simple federal tax returns to pay over the tax you owe and tax withheld, using form 1040-ES/Schedule H process.
• In January, give your employee a Form W-2 for the previous year. Send a copy of the W-2 and a Form W-3 to the Social Security Administration.
• File Schedule H with your personal income tax return. If you don’t file income tax, you can file Schedule H on its own.
• Most of these forms can be downloaded or ordered from the IRS for free.

Do You Owe Overtime Pay?

Don’t assume you can put your nanny on a fixed salary and work him or her as much as necessary. If you employ him or her through an agency, you will probably owe the worker overtime pay for any hours over 40 worked in a 7 day work week. Even if you employ the worker directly (not through an agency) you may owe overtime pay, depending on the type of work. Here’s an exception:

A person you employ directly to provide “companionship care” is not owed overtime. Companionship care is defined as providing “fellowship and protection,” and spending less than 20% of work time helping with such things as bathing, dressing, meal prep, cleaning, etc. Even if you are not required to pay overtime – such as for a companionship caregiver – it’s imperative that you pay your hourly worker for every hour worked.

You should know, there’s no statute of limitations on an overtime dispute. A disgruntled employee you had several years ago may file a costly lawsuit against you if you didn’t get the pay right. This can be very expensive for you if you get it wrong. Judges almost always side with the worker, so avoid trouble by checking with your accountant.

Live-In Help

If you have a live-in domestic employee, does that mean you have to pay him or her 24 hours a day?

• If you employ the worker directly, you don’t have to pay him or her around the clock, but you must pay for every hour worked.
• If you employ the worker through an agency, you don’t have to pay for 24 hours a day but expect to pay overtime if he or she works more than 40 hours in a week.
• Some people opt to hold down costs by having a revolving door caregiver where more than one person comes to your home and nobody works more than 40 hours.

Workers’ Compensation

Workers’ compensation and disability laws vary, and it’s critical that you know and follow the requirements. Twenty states do not require household employers to carry workers’ compensation insurance. However, if your household employee is injured on the job, you could be held liable for the costs involved.

Also, don’t rely on homeowner insurance to pay these costs, unless you have it on good authority from your accountant that your state allows this.

If all of this seems daunting, a quick sit-down with your accountant should make you feel better. Complying with the law isn’t all that hard if you keep good records. Sure, paying under the table is easier and cheaper, but getting yourself out of hot water if you get caught is a hornet’s nest you don’t want to deal with.

Miscellaneous Payroll Points to Remember:

• You need to give your employee a detailed pay stub.
• You must pay at least the higher of federal minimum wage or your state’s minimum wage. Find out the minimums here: https://www.dol.gov/whd/minwage/america.htm
• Check with your accountant for any other state-specific requirements, like paid time off or sick pay.
• You may be able to find some state specific answers and forms here: https://www.dol.gov/whd/contacts/state_of.htm
• You can also find many answers about compliance here: https://www.irs.gov/publications/p926/ar02.html

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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