Is my provider
an employee, or can he/she be classified as
an independent contractor?
Nannies, caregivers and most other household
workers are employees of the family for which
they work. The difference between employees and
independent contractors hinges on the amount
of control one has over the worker. If the family
controls work hours, work place, responsibilities,
work tools (to name just a few), the worker is
their employee. An independent contractor usually
provides his/her own tools, his/her own place
of work, sets his/her own hours and offers services
to the general public.
What taxes need to be withheld
from my household employee?
Your household employee's taxes usually range
from 15-20% of gross wages. These include:
- Half of Social Security & Medicare (7.65%)
- Federal income taxes
- State income taxes (if applicable)
- Employers are only required to withhold Social
Security and Medicare taxes from their employee's
salary each pay period. If both parties agree,
employers can also withhold federal income
taxes.
Do I have taxes
as an employer?
Yes. Household employers can expect to pay employment
taxes that amount to approximately 10% of their
employee's gross wages. These include:
- Half of Social Security & Medicare (7.65%)
- Federal and state unemployment insurance
Can I take advantage
of any tax breaks?
Yes. To lighten the burden that falls on working
parents, Congress has enacted tax benefits for
families through employer-provided dependent
care assistance (Dependent Care Account) and
the Tax Credit for Child or Dependent Care. However,
these tax breaks are only available if the caregiver
is paid legally.
- Dependent Care Account. Most companies allow
employees with child or dependent care expenses
to contribute up to $5,000 of their pretax
earnings to an individual Dependent Care Account.
The money in this account is then used to cover
childcare expenses, free of taxes. The savings
are approximately $2,300 per year.
- Tax Credit. For those who don't have access
to a Dependent Care Account, they can claim
the Tax Credit for Child or Dependent Care
(Form 2441) on their income tax return at year-end.
Basically, they can take a tax credit of 20%
to 30% of qualifying childcare expenses. But
only expenses of up to $3,000 for one dependent,
or up to $6,000 for two or more dependents
can be counted.
Only one of these tax savings options may be used
each year. The Dependent Care Account usually provides
the greater tax savings. Oftentimes, the tax savings
exceed the employer's share of the taxes, actually
saving money by being legal!
What about overtime
pay?
According to federal law, household employees
are entitled to overtime pay. Overtime must be
paid at 1.5 times the hourly wage for all hours
worked over 40 in a 7 day workweek. If a nanny
is paid a salary, overtime should be addressed
in the contract. For example, a nanny and family
agree upon a gross salary of $500 per week for
a 45-hour workweek. The standard wage for the
first 40 hours is $10.53 per hour; the overtime
wage for the remaining 5 hours per week is $15.79
per hour; and the total weekly salary is $500.
No limit is placed on the number of hours worked
in a 7 day workweek, as long as the employment
contract is fulfilled and the employee is fairly
compensated. Please note that live-in household
employees do not have to be paid overtime but
are entitled to equal pay.
What are the vacation,
holiday and sick pay requirements?
Paid vacation, holidays and sick days are not
required by law. These benefits are to be agreed
upon as a part of the employment contract. In
addition, overtime is not required for holidays
worked.
What is the process for
handling payroll and taxes?
The payroll and tax process is quite detailed.
Here's an overview of what's involved:
- Research employment tax and labor laws to
understand legal obligations.
- Register for federal and state tax accounts.
- Complete and file New Hire Reporting.
- Identify and calculate taxes to withhold
each pay period.
- Track gross pay, net pay and taxes withheld.
- Calculate the employer's federal and state
tax liabilities.
- Prepare state and federal tax returns quarterly
and remit the employer and employee taxes.
- Respond to IRS and state inquiries.
- Monitor ever-changing household employment
tax law.
Comprehensive services offered by Breedlove & Associates
can make this process simple and provide peace
of mind at an affordable price.
What
is Worker’s
Compensation?
Every state has a worker's compensation system.
Under these systems, workers injured on the job
are entitled to prompt payment of certain medical
and wage-loss benefits with a minimum of legal
formality and expense. The systems are based
on the idea that the employee gives up the right
to sue for any injuries from work-related accidents,
in exchange for receiving benefits regardless
of fault. Some states exclude household services
from the worker's compensation system.
Are there any tax
breaks if I offer health insurance?
Yes. When a household employer contributes toward
health insurance premiums, these dollars are
not considered taxable income. Neither employer
nor employee is required to pay taxes on these
dollars. A family may choose to pay the healthcare
premium directly to the health insurance company.
Families may also choose to give these dollars
directly to their employee. In this case, the
family must keep a copy of a current health insurance
card on file for proof of a current insurance
policy.
Can I run my household
employee’s payroll through my own business?
No. This is illegal. Here's a simple explanation:
All businesses are allowed to take tax deductions
on employee payroll. The logic is that employees
are direct contributors to the success of the
business, and the owner is allowed a "tax break" on
a portion of total payroll to offset some of
this expense. Household employees like nannies,
housekeepers, chef, etc., do not directly contribute
to a business; therefore, it is illegal for a
business to receive any kind of "tax break" on
his/her payroll. A nanny is considered a contributing
member of the household; therefore, a family
is entitled to take a "tax break" on his/her
payroll as a childcare expense instead.
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