Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

Do you have a household employee?

Do you have a babysitter, nanny, maid, health care provider, or other domestic worker? If so, they may be your employee. The worker is generally your employee if you can control not only what work is done, but also how the work is done. Whereas, if the worker controls how the work is done, the worker is generally not an employee. For example, a self-employed worker who provides their own tools and offers services to the general public is usually an independent contractor, not an employee. It does not matter whether the work is full-time or part-time, or that you hired them through an agency or from a list provided by an agency. It also does not matter whether you pay the worker on an hourly, daily, or weekly basis, or by the job. For more information see IRS Publication 926.

So, you have determined you have a household employee. What should you be aware of?

Are they being paid a salary? Household employees are classified in the Fair Labor Standards Act as non-exempt workers. This means their payroll should be set up on an hourly rate for every hour worked. If they will be working a set number of hours each week, you can offer a weekly “salary,” but you should translate the amount into an hourly rate in their employment contract so fluctuations in their hours can easily be calculated and detailed on paystubs. As a non-exempt employee, they also must be paid overtime if they work more than 40 hours in a seven-day workweek. Overtime is paid at least 1.5 times the regular hourly rate and should be spelled out in the employment contract. Be aware of your specific state requirements regarding live-in employees. Federal law exempts household employers from paying overtime to live-in employees, but they must be paid for every hour they work.

Perhaps discuss with your employee the amount that will end up in their bank account during compensation discussions to avoid surprises on the first payday. It’s important the employee understands how tax withholding works. You may want to show them a few payroll scenarios to illustrate the difference between gross wages and net pay.

Think about paid time off. While federal law does not currently require you to provide paid time off for vacations, holidays or sick time, it is an important benefit if you want to attract and retain a high-quality employee. Be aware of any specific paid time off requirements of your state.

This may seem like “tax stuff” that can wait until “tax time”; however, don’t procrastinate. Employers must withhold FICA taxes from the employee or you will become liable for them. Many states also have wage reporting obligations throughout the year. Waiting until tax season to address tax issues and labor law issues may well result in additional expenses that would be cheaper and easier to handle at the time of hire.

By Pamela Wheeler, EA