Independent Contractor or Employee? How to Classify Your Nanny
Federal law dictates that household workers like nannies, housekeepers, and in-home senior caregivers are to be treated as employees and not independent contractors. This is an important distinction for families and the employees they hire to work in their homes.
Generally, if the family defines the work that needs to be done and controls how it is done, they are considered an employer and their worker filling the job is an employee.
Nearly all of the time, the IRS classifies a nanny as an employee. They should have taxes withheld and receive a W-2 at the end of the year while the family pays their share of employer taxes.
Let’s look at the differences between employees and independent contractors.
|Takes instruction from the employer.||Is told desired, final results but works under their own conditions.|
|Has a schedule set by the employer.||Sets their own schedule.|
|Uses tools and equipment provided by the employer.||Uses their own supplies.|
Now let’s see how these differences apply to a nanny and a lawn care worker.
|Nanny||Lawn Care Worker|
|The family tells the nanny what to feed their children; when they should nap; how much TV time they get; and other parameters on how they want their children looked after.||Instructions||A lawn care worker uses their own judgment to get the results as desired by the homeowner. They may take suggestions from the homeowner but ultimately will make their own decisions.|
|The family sets the days and period of time that the nanny should be at the home to care for their children.||Schedule||A lawn care worker determines when they start and stop work on a particular day and may not work at all if it’s raining.|
|The nanny uses toys, diapers, strollers, and other items that the family provides when caring for the children and has access to the family’s kitchen and utensils to prepare the children’s meals.||Tools and supplies||A lawn care worker uses his own tools and supplies such as a tractor, hedge trimmer, grass seed, and fertilizer.|
With a nanny, it’s clear that the family is defining the work that needs to be done, setting the nanny’s schedule, and providing the tools and equipment to do the job. That’s why a nanny is considered an employee.
Meanwhile, the lawn care worker makes their own decisions, sets their own schedule and uses their own tools and equipment. They could be considered an independent contractor.
Why is worker classification important to families?
Misclassification – treating a nanny as an independent contractor and not as an employee – is considered felony tax evasion and could lead to major fines, penalties, and payment of back taxes. If desired, a family can submit Form SS-8 with the IRS to get a determination of a household worker’s status.
With an employee, the family must withhold Social Security and Medicare (FICA) taxes from their employee’s pay and remit the employer share. Both the employee and employer pay 7.65 percent of cash wages for FICA. A family can choose to pay their employee’s share and contribute the entire 15.3 percent on their own.
A family is also responsible for paying federal and state unemployment insurance and may be required to obtain a workers’ compensation policy.
Why is worker classification important to household workers?
|Employees pay their share (7.65 percent) of Social Security and Medicare taxes (FICA) while the family contributes the employer share (7.65 percent).||Tax obligation||Independent contractors pay more in taxes as they are responsible for both employee and employer FICA taxes, which adds up to 15.3 percent of wages.|
|Families pay federal and state unemployment insurance. If a household employee loses their job through no fault of their own, they can file for unemployment benefits with their state. An employee will receive a portion of their wages while they look for a new job.||Unemployment insurance||An independent contractor is not provided unemployment insurance benefits if they are let go from a job.|
|In many states, families are required to purchase a workers’ compensation insurance policy if they hire someone to work in their home. Workers’ compensation helps pay medical expenses and cover lost wages for employees who get hurt on the job. This can be a lifeline for a worker who may accumulate significant medical bills while missing time at work.||Workers’ compensation||Independent contractors are not covered by workers’ compensation.|
|A family can set up and contribute to an employee’s health insurance coverage, retirement plan, or a number of other benefits. These are nice perks that can help an employee control health care costs and plan for the future.||Benefits eligibility||Independent contractors aren’t eligible to receive these types of benefits.|
As you can see, it’s much more advantageous for a nanny and other household workers to be classified as employees and not independent contractors.
For information on how to pay your household employees the right way, download The Complete Guide to Household Payroll.