W-2 or Independent Contractor?

Families may wonder how to classify their household workers, such as nannies, senior caregivers, and housekeepers, during tax season, either as independent contractors (1099s) or W-2 employees. These are two very different classifications, and it is important to understand them, as misclassifying your worker can have major legal and financial consequences.

Household employees are required to be given a W-2 form and cannot be classified as independent contractors.

What is the Major Difference Between W-2 Employees and Independent Contractors?

There are three major categories to look at when determining which classification a worker falls into: behavior control, financial control, and the type of relationship.

An independent contractor is hired to perform a specific task or duty but is not on the employer’s payroll and is only involved for a limited time. The contractor controls when, where, and how the task gets done. They also keep track of their own costs of doing business and report their own income to the IRS. They don’t have access to employment-related benefits. This includes unemployment insurance and workers’ compensation, and the employer avoids paying employment taxes.

Alternatively, a W-2 employee is typically someone on the employer’s payroll and is hired for an indefinite amount of time to complete ongoing work. They report to their employer, who determines when, where, and how work is completed. Taxes are automatically deducted from each paycheck, and the employer contributes their share of employment taxes. They also have access to employment-related benefits.

What is My Nanny?

The IRS considers nannies as W-2 employees if you pay them more than $2,800 in a calendar year. As you have significant control over your nanny’s work and schedule, you are responsible for withholding taxes and complying with all payroll regulations. These regulations include paid leave laws.

While classifying your nanny as an independent contractor might seem simpler initially, it carries severe consequences. The IRS considers this tax evasion, and you could face substantial penalties, including payment of back taxes and fines.

Let GTM handle the paperwork involved with having a W-2 employee. We will withhold all state and federal taxes and ensure your nanny is given everything they need for tax time. Call (800) 929-9213. Get a complimentary, no-obligation consultation with a household employment expert. Or schedule time with us at your convenience.

Hiring a nanny?

Download Your Guide to Hiring a Nanny. In this guide, we lay out the steps on how to hire a nanny the right way and maintain a strong relationship with your employee.