Why Referring Household Clients to a Business Payroll Firm is a Bad Idea

You may handle taxes for business clients, so when you get a family with household help you refer them to the same business payroll firm to help pay their employee. Or maybe you just know the big business payroll firms and send your household clients their way. Payroll is payroll, right? Referring your families with household help to a business payroll firm creates risk for your clients that may come back to you if they get fined or penalized for non-compliance. There are nuances to household payroll that a firm focusing on businesses may miss.

Setting up your client as an employer the right way

Household employers need to obtain a federal employer identification number (EIN) just like any other business. Business payroll firms, unfamiliar with how to setup families as employers, may skip this step and file your client’s taxes using a Social Security Number. That’s not how a household employer should file their taxes.

Obtaining workers’ compensation coverage

Workers’ compensation coverage is required for household employers in many states. Will a business payroll firm advise your client when they need a policy? They may not even know it’s a requirement. Lack of workers’ compensation is one of the costliest mistakes a household employer can make. Fines can be as much as $5,000 for every 10 days of non-compliance.

Complying with paid family and sick leave laws

There a number of new paid family and sick leave laws. New York; New Jersey; Massachusetts; and Washington, D.C. are some of the latest to require paid time off for employees. Often, these laws include household employers even if they have just one employee. Will a business payroll firm understand how the laws apply to households? Will they make the proper deductions and/or tax payments on behalf of your clients?

Filing Schedule H and not Form 941

Using Form 941 and not Schedule H is a common way business payroll firms handle household employer taxes. This misstep can increase the risk of penalties, cause dual reporting to the IRS, and create other accounting issues. Schedule H was created specifically for household employers to report wages paid to employees during the year. It’s an annual filing that’s prepared with your client’s personal income tax return. Form 941 is for businesses.

Classifying household workers as employees, not independent contractors

A business payroll firm may not understand that someone who works in a private home is almost always considered an employee and not an independent contractor. The firm could decide to issue 1099s to your client’s employees and let them pay both the employer and employee FICA taxes. However, misclassification is considered felony tax evasion and will get your client in a ton of trouble with the IRS.

Following a Domestic Worker Bills of Rights, overtime laws and sleep time rules

There are plenty of nuances to household employment that business payroll firms just don’t encounter enough times to be able to steer your client toward compliance. There are sleep time rules for live-in employees and caregivers on 24-hour shifts, companionship care overtime exemptions for senior caregivers, overtime and minimum wage laws, and several states and cities like Seattle and Philadelphia have enacted domestic worker protections. If these regulations aren’t followed, clients could be fined for labor violations or face an employee lawsuit for back wages.

Keeping household and business payroll separate

Maybe the business payroll firm is handling your client’s company payroll so why not just have them do the pay for the family’s household employee too. The business payroll firm may just place the household employee on the company payroll to keep things simple. However, household employees can’t be paid on a business payroll. Tax deductions on business payroll require all employees to be “direct contributors of the business.” That means including a household employee on business payroll is an illegal tax deduction.

Providing exceptional support and expertise

When handing your client off to a third-party, you need to trust that your partner will provide the same level of knowledgeable support and superior service you give your clients. Household payroll is no different. Your clients should be able to reach certified payroll professionals, household employment tax experts, licensed insurance brokers, and human resource advisors by phone, email, and web chat.

There is too much that can go wrong when a business payroll firm handles a family’s household payroll and nanny taxes. You may not be directly at fault if a client gets fined or sued but they do expect you to steer them away from trouble. Don’t jeopardize your client relationship – or lose a client altogether – over the mishandling of nanny taxes.

GTM can help

GTM Payroll Services partners with accountants and CPA firms to manage household payroll, taxes, insurance, and compliance for their high-net-worth clients. Our team of employment experts will help keep them compliant with federal and state tax, wage, and labor laws. Learn more about how we can work with you and your clients by contacting us at [email protected] or (800) 929-9213.