If you’re managing the household payroll processing and tax filings for clients who have a domestic employee like a nanny or housekeeper, you may be making some common mistakes. These missteps could jeopardize your client’s compliance and lead to fines and penalties.
1. Classify a Domestic Employee as an Independent Contractor
It may be tempting to classify a nanny or housekeeper as an independent contractor so your client can avoid employer taxes. However, if your client defines the work that needs to be done and controls how it is done, they are an employer and the person filling this job is their employee. We have found that nearly all of the time the IRS classifies a nanny as an employee. They should have taxes properly withheld and receive a W-2 at the end of the year. Misclassification is considered tax evasion.
2. Forget to Complete or File All Necessary Paperwork
Before an employee starts work, your client needs to obtain an employer identification number and an unemployment identification number as well as file a new hire report with their state. Employees must complete an I-9 (Employee Eligibility Verification) and a W-4 (Employee’s Withholding Allowance Certificate). At the end of the year, the employee must be given a W-2. Your client must file Form W-3 (Transmittal of Wage and Tax Statements) to the Social Security Administration and Schedule H with their personal tax return.
3. Fail to Pay Taxes Properly
If your client pays an employee $2,100 (2018) or more, then they need to pay Social Security and Medicare taxes, which is 7.65 percent of the employee’s cash wages. In addition, if the employee’s wages amount to $1,000 or more in any calendar quarter, your client must pay federal unemployment tax, which is six percent of cash wages on up to $7,000 in wages per employee. There may also be a state unemployment tax.
Your client is also responsible to deduct Social Security and Medicare taxes from their employee’s pay as well as federal and state income taxes based on the employee’s W-4.
4. Ignore Minimum Wage and Overtime Laws
According to the Federal Labor Standards Act (FLSA), household employees must be paid at least the federal minimum wage of $7.25/hour or the state’s minimum wage (whichever is higher). Some cities have minimum wages that are higher than the state. Domestic workers must also be paid time and a half for house worked over 40 hours/week. Some live-in nannies may be exempt from overtime pay depending on the state.
5. Lack of Knowledge about Labor Law Nuances
Several states have enacted what is known as a Domestic Workers’ Bill of Rights. These laws make clear that domestic workers have many of the same basic state and federal labor rights as the traditional workforce. A state’s bill of rights may dictate how often a domestic worker gets paid, how much rest time they are required to receive, what should appear on their pay stubs, and even maternity leave.
6. Overlook Workers’ Compensation Insurance
Many states require household employers to have a workers’ compensation policy for their domestic workers. Your client should never assume that this liability is covered under their homeowner’s insurance. A single work-related accident could leave your client liable for medical bills and lost wages, so it is important to ensure that they are covered according to their state’s requirements.
7. Miss Opportunities for Tax Breaks
There are a couple of ways that your client can take advantage of tax breaks for those that pay for child care. Their employer may offer a Dependent Care Assistance Program (DCAP) or Flexible Spending Account (FSA) where they can set aside up to $5,000 a year in pre-tax funds that can help pay for certain expenses like a nanny’s salary. There’s also the Child & Dependent Care Tax Credit where you can claim up to $3,000 of qualifying expenses for one dependent or $6,000 for two or more.
Many CPAs would rather outsource their clients’ household payroll processing so they can free up their time and energy for their core practices. The big challenge is finding a firm they can trust – one with the level of experience and commitment to service that inspires confidence. CPAs partner with GTM Payroll Services for just these reasons. We have specialized in household payroll since our founding in 1991. Today, we process more than $1 billion in payroll every year for more than 30,000 employees. We’re also trusted by Fortune 500 companies to manage household payroll for their executives and clients.
When you partner with GTM, we take on all the administrative tasks of household payroll while providing you online access to your client’s payroll and tax information. You stay in control while we do the work. For more information, visit our CPA and Financial Partners page or call (800) 929-9213.
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