If you need the help of a nanny, a housekeeper, or handyperson in your home, you may be considering hiring a domestic worker. Before you hire anyone, learn about the practical and legal issues that you may face. For example, you will need to determine if the worker is an employee or independent contractor, as well as follow IRS and other rules.
Who to Hire
Once you've decided you need help, it's time to start looking for someone to hire. After doing some preliminary research about the qualifications you're looking for (a nanny with a background in child development, for example), you have a few options:
Hire a company. Usually, if you hire a company to do the work, the company will send over qualified workers and be in charge of paying them. It will also pay employment taxes and have insurance coverage to protect you in case of worker injury or damage to your property. (Ask for proof of this insurance.) It's not uncommon to hire companies to clean your home or garden, or to service your pool.
Hire a worker through an agency. If you want a skilled professional but don't know where to look or want one already individually vetted by a third party, you can hire through an agency. You may pay the agency directly, in which case the agency will probably be the actual employer, and will cover insurance, handle employment taxes, and pay workers. (You should confirm this with the agency first.)
Other agencies may charge you a fee to find you a qualified employee, but you will be the employer and handle these tasks. This is common when hiring a nanny, for example.
Hire an individual. If you want to screen and select your own service provider, pay and negotiate with her directly, and direct her work, your best bet is to hire an individual. As we'll explain below, you have more obligations as the employer if you elect this route.
Employee or Independent Contractor?
If you hire an individual to work in your home, you will have to comply with tax laws and other rules. Your level of responsibility is determined, in large part, on whether the worker is your employee or an independent contractor. The distinction matters because you have more responsibility for an employee than you do an independent contractor.
To complicate matters, there's no one definition of who qualifies as an "employee." That's because several different government bodies have an interest in how you classify your workers. To comply with the law, it helps to understand the requirements for each agency. For example:
- The IRS and state tax agencies want to know whether a worker is an employee because you are required to pay and withhold taxes for employees.
State and federal labor departments care who is an employee because employees may be entitled to certain protections, such as minimum wage and overtime provisions, while independent contractors are not.
State unemployment insurance or workers' compensation boards want to know whether a worker is an employee because someday, the worker may file for unemployment or be injured on the job, and you'll need to have insurance to cover these situations.
In general, the more control you exercise over the worker, the more likely you will be considered the "employer" by any of these agencies. If you hire the person to work certain hours, direct what the person does and how it's done, and the person works only for you, you are probably an employer. For example, a nanny you hire to watch your children each day will probably be considered an employee.
On the other hand, if the person offers his or her services to the general public, furnishes his or her own equipment or tools, and controls how and when work is done, the person is more likely an independent contractor. These individuals are more like independent businesspeople. Gardeners or trained professionals like electricians are commonly independent contractors.
Your Tax Responsibilities
If a worker is an independent contractor, your federal tax responsibilities are few. In fact, you don't even need to fill out the IRS form (1099-MISC) usually required when hiring independent contractors because an exception excludes household workers.
But it's a different story if you are the worker's employer. Here are some of your responsibilities:
Get an employer identification number. For starters, you'll need to let the IRS know you're an employer, and get an employer identification number (EIN), which you can do via the IRS website at www.irs.gov.
Check immigration documents. Also, you'll have to verify that the individual is legally authorized to work in the United States by having the worker fill out U.S. Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. You won't have to submit this document to anyone, but you will have to keep it on hand in case you are audited.
Pay taxes. If you pay a worker $1,600 per year or more in 2008 (the amount changes each year), you and the employee must each pay 7.65% of the employee's wages in Social Security and Medicare taxes. In addition to your half, you are responsible for withholding the employee's share of these taxes. And you'll have to check with your state tax agency to find out its withholding requirements.
If you pay the employee $1,000 or more in any calendar quarter (any three-month period), you'll also have to pay federal unemployment (FUTA) taxes. The rate varies from state to state, but is usually .8% of the first $7,000 of annual wages paid to an employee.
Also, you'll have to file IRS Form W-2 at the end of the year. Some people choose to hire a payroll service to handle these tasks.
Your Insurance Responsibilities
What happens if your employee is injured on the job? Usually, employers are responsible for paying for workplace injuries, and state law requires employers to have workers' compensation insurance to cover them. Whether you'll need it or not depends on the state you're in -- some states exclude domestic employees entirely, while others limit it to employees who work a certain amount or to employers of a minimum size. (The U.S. Department of Labor, at table listing each state's rules.)
If you are required to purchase workers' compensation insurance, you may be able to obtain the coverage through your homeowner's insurance policy. Though coverage for workers is generally excluded, you can usually buy a rider or endorsement.
Also, you will probably have to pay for state unemployment insurance for your domestic worker. This provides income replacement and other work placement services to the worker if you end the employment relationship and the person is unemployed. The cost of this insurance varies by state.
Paying Your Employees
If you hire a domestic employee, you will have to comply with state and federal laws regarding paying that employee. For example, you must pay the employee at least the minimum wage in your state. (As a practical matter, you may have to pay much more than the minimum wage because it may be hard to find someone willing to work for any less.) You may also have to pay overtime, though federal law doesn't require it for a household employee who lives in your home or for caregivers.
To learn more about the rules for hiring independent contractors, get Working With Independent Contractors, by attorney Stephen Fishman (Nolo).
Copyright 2009 Nolo For more information visit Nolo Press