What Families and Nannies Need to Know about Worker Classification

Nov 21, 2018 | Employee Benefits, Hiring an Employee, Household Payroll & Taxes, Tax & Wage Laws

worker classification

Worker classification may seem confusing when hiring a nanny but there really is only one clear answer.

Independent contractor or employee? Worker classification is an important first step in the professional relationship between family and nanny. So it’s critical to get it right.

What is the difference between an independent contractor and an employee?

An employee:

  • Takes instruction from the employer
  • Has a schedule set by the employer
  • Uses tools and equipment provided by the employer

An independent contractor:

  • Works under their own conditions
  • Sets their own schedule
  • Uses their own supplies

Is a nanny an employee or an independent contractor?

Federal law on worker classification dictates that household workers like nannies, housekeepers, and in-home senior caregivers are to be treated as employees and not independent contractors.

Based on the differences outlined above, it’s clear that a nanny:

  • Takes instruction from the family on how to care for their children (when they should take naps, what food they can eat, how much screen time they’re allowed, etc.)
  • Is told when to show up at the home to work and how long they need to be on the job
  • Uses the family’s supplies such as strollers, diapers, and kitchen utensils while caring for the children

If you desire further clarification, submit Form SS-8 with the IRS to get a determination of your nanny’s worker classification.

Why does worker classification matter to families?

Treating a nanny as an independent contractor is considered felony tax evasion and could lead to fines, penalties, and payment of back taxes. It also means that the family needs to withhold Social Security and Medicare taxes (FICA) from their employee’s wages and pay the employer share of FICA taxes. Families can remit these taxes quarterly using Form 1040-ES. Families will also be responsible for unemployment taxes and may need to purchase a workers’ compensation policy. At the end of the year, the family needs to supply their nanny with Form W-2 and file Schedule H with their personal tax return.

How does worker classification benefit nannies?

Pay less in taxes

Independent contractors pay both employee and employer FICA taxes, which adds up to 15.3% of wages. An employee, on the other hand, only pays their share (7.65%) while the family contributes the employer share (7.65%).

Receive unemployment insurance benefits

As mentioned, families also 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. An independent contractor is not provided this benefit if they are let go from a job.

Covered by workers’ compensation insurance

In many states, families are required to purchase a workers’ compensation 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. Independent contractors are not covered by workers’ compensation.

Eligible for benefits

Some states require employers – including household employers – to provide paid sick leave to their employees and workers may even be eligible for paid family leave. A family may choose to offer health insurance or a retirement plan for their household worker. These are all nice perks that can help a worker control health care costs and plan for the future. However, these types of benefits are only possible for workers who are considered employees. Independent contractors aren’t eligible to receive benefits.

GTM Can Help

Need to talk with a household employment expert? Call us at (800) 929-9213 and get a free, no-obligation consultation with one of our experienced support staff. We’ll help answer your questions and get you on the road to compliance. Or if you’d rather not deal with the complications of household employment law, GTM Payroll Services offers a comprehensive nanny tax and payroll service that will handle all of your needs.

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