When you hire private, in-home senior care, you may become a household employer. While this will give you more control over the employment situation, a number of tax, wage, and legal nuances come along with being an employer. Here’s what you need to do when hiring in-home senior care.
1. Classify the senior caregiver as an employee
If you have the right to control what, when, where, or by whom the work is performed, you have hired an employee. The IRS has consistently ruled that domestic workers, such as private, in-home senior care workers, should be classified as employees.
An in-home senior caregiver takes instruction from the family on how to care for the senior. The family also sets the caregiver’s schedule and provides the tools and equipment (such as utensils and access to the kitchen to prepare meals, for example) for the caregiver to do their job. The family is in control so their worker is considered an employee.
It’s important to know the differences because misclassification can be considered tax evasion. When in doubt, refer to IRS Form SS-8 to determine a worker’s status.
2. Keep the senior caregiver off company payroll
The IRS doesn’t allow a domestic employee, such as an in-home senior caregiver, to be paid through business payroll. This may be tempting for if you are a business owner. However, tax deductions on business payroll require all employees to be direct contributors to the success of the business. The IRS has previously ruled that domestic employees do not qualify as direct contributors.
3. Complete pre-employment paperwork
Being a household employer comes with its fair share of paperwork. You must apply for a federal employer identification number by submitting Form SS-4. You’ll also need to file a new hire report with your state and obtain an I-9 (employment eligibility verification) from your employee.
4. Calculate tax responsibility
The IRS defines a household employer as someone who pays an individual $2,100 or more in a calendar year to work in their home (in 2017 this threshold was $2,000). If that threshold is met, then you must withhold 7.65 percent of your employee’s gross wages for Social Security and Medicare taxes. As an employer, you remit the same amount for a total of 15.3 percent of cash wages.
Also, if you pay total cash wages of $1,000 or more in any calendar quarter to their employee, you must pay unemployment taxes. This tax is six percent of the first $7,000 in cash wages. You will also owe state unemployment insurance taxes.
5. File correct tax forms
You can file and remit federal taxes quarterly using Form 1040-ES. State employment taxes can be filed quarterly as well.
Your employee should receive a W-2 by January 31. That’s the same date that you need to submit the W-2 and a W-3 to the Social Security Administration.
The W-3 is a reconciliation of all W-2s even if you have just one domestic worker.
You also need to file Schedule H with your personal federal income tax return. Schedule H is an annual reconciliation form that is used to report wages paid to household employees throughout the year.
6. Follow minimum wage and overtime laws
Domestic workers must be paid an hourly wage. A fixed salary is against the law.
Under the Fair Labor Standards Act (FLSA), household employees must be paid at least the federal, state, or local minimum wage, whichever is highest. The federal minimum wage is $7.25/hour. However, many states and cities have a higher minimum wage.
Domestic workers are also required to be paid time and a half for hours worked over 40 in a week. Overtime for live-in employees may vary by state. For example, in New York, overtime for live-in domestic workers kicks in at 44 hours in a workweek.
7. Understand labor laws nuances
There are a number of nuances to labor laws as they apply to in-home senior care.
If the work meets the definition of “companionship care,” then the employee is exempt from overtime pay requirements. Companionship care is defined as “fellowship and protection” where less than 20 percent of the caregiver’s time is spent on the Activities of Daily Living (ADL) such as bathing, dressing, meal prep, and cleaning.
If the worker will be a “live-in” employee, federal regulations state that up to eight hours of sleep time can be unpaid if there are adequate sleeping facilities, at least five hours of continuous sleep is possible, and you have a written agreement with your employee. However, California does not allow sleep time to be unpaid.
Several states (California, Connecticut, Hawaii, Illinois, Massachusetts, Nevada, New York, Oregon) have enacted Domestic Workers Bills of Rights, which specify certain protections for household employees. New York was the first state that passed a Domestic Workers’ Bill of Rights. Among the protections afforded household employees in New York:
- Minimum wage and overtime regulations must be followed.
- At least three paid days off are granted to the employee after one year of employment with the same employer
- One day of rest per week must be provided
- Written notices on sick leave, vacation, personal leave, holidays, hours of work, regular and overtime pay rates and regular payday must be provided
- Unemployment insurance, workers’ compensation, and statutory disability are required
- Employees must be paid weekly
- Employees are provided coverage under the state’s human rights law
8. Purchase workers’ compensation insurance
In many states, household employers are required to purchase workers’ compensation insurance. Having coverage will help pay for medical expenses and lost wages if an employee is hurt or becomes ill on the job. Never assume that these protections are covered under your homeowner’s insurance.
Not having the required coverage can be costly. In New York, for example, a household employer without workers’ compensation insurance could face a fine of $2,000 per every 10-day period of noncompliance. The employer could also be held liable for at least a portion of their worker’s lost wages and medical expenses.
Even a voluntary policy can be beneficial. If a domestic worker accepts workers’ compensation benefits, they forfeit the right to sue their employer.
Five states (California, Hawaii, New Jersey, New York, Rhode Island) require domestic employers to make payroll deductions for disability insurance. These employee-paid programs provide short-term benefits to employees who are unable to work due to a non-work related illness or injury.
9. Take advantage of tax deductions
A household employer may reduce their tax burden through a Flexible Spending Account, the Child and Dependent Care Tax Credit, and/or medical expense deductions.
First, the employer must determine whether the person receiving care is their qualifying dependent. Refer to IRS Publication 501 for guidance on determining a qualifying dependent.
A family can reimburse their dependent care expenses (such as employer taxes or a portion of the caregiver’s pay) with pre-tax funds through their employer-sponsored Dependent Care Assistance Program (DCAP) or Flexible Spending Account (FSA). Up to $5,000 per year of tax-free money can be set aside for qualifying expenses.
An employer may also be able to take advantage of the Child and Dependent Care Tax Credit on their personal income tax return. Up to $3,000 of qualifying dependent care expenses (such as a caregiver’s salary) paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals can be claimed. You could receive between up to a 35 percent credit on these expenses depending on your adjusted gross income (AGI). A non-child dependent must be physically or mentally incapable of self-care and has lived in your home at least half the year in order for you to claim the credit.
A family may be able to claim an itemized deduction for qualifying caregiving costs as medical expenses. In 2017 and 2018, medical expenses in excess of 7.5 percent of AGI are deductible for all taxpayers, not just those aged 65 or older. In subsequent years, the threshold reverts to 10 percent of AGI.
Only “qualifying” expenses are eligible. Medical expenses include amounts paid for qualified long-term care services. Wages paid to in-home caregivers for caring for the elderly person’s condition – such as giving medication, bathing, and grooming – may qualify. However, if an employer pays a caregiver to perform household tasks such as cooking and cleaning, they won’t be able to deduct these wages as a medical expense. Refer to IRS Publication 502 for additional guidance on medical expenses.
Looking ahead to next year’s tax filings, the recent Tax Cuts and Jobs Act (TCJA) created a non-refundable $500 credit for non-child dependents such as college students or elderly parents. The credit will be available to joint filers with an AGI of up to $400,000 and $200,000 for all other filers.
Paying a household employee can be complex and confusing. GTM is here to help. Download The Complete Guide to Household Payroll. We also offer a free, no-obligation consultation with a domestic employment expert. Call (800) 929-9213 with all your questions.
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