Running a home-based business is an exciting endeavor to undertake. It’s how HomePay got started all the way back in 1992. A big challenge our founders faced in the beginning was juggling running the business and raising their young children. In the end, they hired a nanny to alleviate some of the stress. Some of you may be facing a similar situation either with kids or an elderly loved one and need a caregiver to help out in your home.
While your entrepreneurial spirit no doubt spawns tons of creative business ideas, not many of us are payroll, tax or HR experts with experience in household employment. There’s a ton of misinformation floating around on the Internet, so here’s four mistakes you’ll want to avoid when hiring a caregiver.
1) Classifying your employee as an independent contractor
The IRS considers your caregiver to be your employee because you are controlling the working relationship. You dictate how the work is performed, when it’s performed, where it’s performed, etc. An independent contractor would, by contrast, be setting their own terms for how care will be provided to your loved ones.
From a tax perspective, household employees are given a W-2 during tax season to file their personal income tax returns while independent contractors use Form 1099. The IRS and Department of Labor have recently cracked down on worker misclassification – the practice of giving an employee Form 1099 – and the penalties for getting caught are fairly high because it’s considered a form of tax evasion.
2) Your employee can be paid through your company’s payroll
It may seem like a logical move to place your caregiver’s wages on your business’ tax returns, but the IRS says this is a no-no. The reason is because household employees are not “direct contributors” to the success of your business and taking any tax deductions on this type of payroll expense would be illegal.
Instead, your caregiver’s payroll should be handled separately through the household employment reporting process. The good news is, there are dependent care tax breaks associated with your caregiver’s wages that can be applied to your personal income tax return. Many families save hundreds, or even thousands of dollars with these tax breaks.
3) Your caregiver can be paid a salary to avoid overtime
Nannies, senior caregivers and other household employees are considered non-exempt workers under the Fair Labor Standards Act (FLSA). That means they must be paid overtime for all hours over 40 in a 7-day work week (live-in caregivers are generally an exception to this rule, although a few states require live-ins to be paid overtime as well). Overtime hours must be paid at a rate that is at least 1.5 times the employee’s regular rate of pay.
A common mistake we see from families is offering a “salary” to avoid having to pay overtime. There is a common misperception that salary jobs are legally able to pay a fixed amount of wages regardless of how many hours the employee works. This is true for many professionals because they are considered “exempt” workers as defined by the FLSA. In the case of “non-exempt” household workers, however, a fixed salary is illegal.
Overtime issues are particularly dangerous for families because a disgruntled former employee can file a wage dispute long after the working relationship has ended. The state can force families to pay back wages plus back taxes, penalties and interest, which can make this a very expensive mistake.
4) You can wait until tax time to address household employment taxes
Just like your business tax returns, household employment tax returns are sent to the state and IRS throughout the year. Missing deadlines can turn into a giant headache during tax season. Utilizing a specialized service like HomePay can ensure this never happens and leave you with more time to focus on your business.
