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The U.S. Department of Labor looks closely at “worker classification issues” under the federal Fair Labor Standards Act (FLSA). For household employers, worker classification refers to whether a worker is classified as an employee vs. an independent contractor for federal and state employment tax purposes. It is very important that an employer knows the difference between the two so that both parties’ taxes are filed properly. An employer can be penalized with having to pay 100% of associated payroll taxes of any payments made for services if the worker status is determined incorrectly. Additional fines, penalties, and interest may apply, and the effect on the family-nanny relationship could be devastating if it is determined the worker owes years of unpaid taxes.
The IRS uses three main categories to determine worker status: behavioral, financial, and type of relationship.
- Behavioral: Does the employer control or have the right to control what the worker does and how the worker does his or her job? The more control an employer has, the more apt the worker is to be considered an employee. Whose equipment and facilities is the worker using to perform the job? If the worker attends to job requirements on-site at the employer’s home or facility and uses the employer’s equipment and tools to do so, then she or he is probably deemed an employee.
- Financial: Are the business aspects of the worker’s job controlled by the employer? (These include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.). Then the worker would be considered an employee. Are the worker’s contributions integral to the business? Will the business suffer if the worker was not contributing to its operations and success? If so, employee status is likely. On the other hand: if the worker faces an economic risk in doing the job, he or she would more likely be identified as an independent contractor.
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? Is the working relationship permanent? A permanent working relationship is likely an employer-employee relationship.
The vast majority of household workers are employees, not independent contractors. Families who try to avoid their tax obligations by attempting to define their nanny as an independent contractor may want to reconsider. The IRS is aggressively pursuing these cases and has been known to add penalties to tax and interest owed, along with civil penalties.
However, some temporary babysitters who work for many friends and neighbors on an irregular, sporadic schedule are considered independent contractors. For assistance in determining status, the U.S. Internal Revenue Service (IRS) offers Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding). You can file this with the IRS if you are unclear about the status of your worker, the IRS will then review and officially determine the worker’s status for you.
Employers hiring independent contractors are not required to withhold income tax or make employer contributions to the worker’s Social Security fund. If an employer pays an independent contractor $600 or more per year (as of 2011), then he or she must report it to the IRS using Form 1099-Misc. Upon hiring the contractor, an employer should request the contractor complete a Form W-9, which provides his or her Social Security number or employer identification number (EIN).
When hiring any employee, be sure all employment documents have been completed and verified prior to the start of work. An independent contractor should also be asked to verify insurance for the work required, if necessary.
Please download the EEOC’s checklist for determining whether you are hiring an employee or an independent contractor, and contact the Household Employment Experts at GTM for more information.
