1099 vs. employee: Why the difference matters when you hire a caregiver

nanny as independent contractor

While you may think of your nanny or in-home caregiver as more of an independent contractor than employee, the fact of the matter is the government usually thinks otherwise. In almost all cases, nannies and other types of caregivers are considered household employees under the law.

 

Why does this matter? It's an important distinction when you file taxes as employees require different tax forms (Form W-2) than independent contractors (Form 1099). If there's any doubt in your mind as to which classification your caregiver falls under, the IRS and the Department of Labor make it clear. Let's go through it:

 

How the IRS distinguishes employees and independent contractors

The IRS can help you determine whether a worker is an independent contractor or employee if you or your caregiver sends in a Form SS-8. The form goes through five sections of questions to determine which party (family or caregiver) has control and independence. Admittedly, the IRS says it can take up to six months to get an answer and most families will not want to wait that long.

 

To save you the trouble of sending in an SS-8 form, the IRS has ruled in almost all cases that household workers should be classified as employees. "We've spoken to the IRS in the past about nanny and senior caregiver employment situations and it's nearly unanimous in favor of employee because the family has control over the schedule their caregiver has to work, the duties they must perform and they have the ability to hire back-up care if their caregiver is unable to work on a particular day," says Tom Breedlove, Sr. Director of Care.com HomePay.

 

An independent contractor, on the other hand, would be dictating to you when they're available to work, would have specific procedures for how they will do their job and would have a network of contacts to fill in for them if they had to miss a day on the job.

 

How the Department of Labor defines employees versus independent contractors

Like the IRS, the Department of Labor (DOL) can pursue employers that are not following the law. The DOL looks to the Fair Labor Standards Act to give guidance on whether a worker is an employee or an independent contractor and there are different criteria for both distinctions. The DOL has seven factors to consider when classifying a worker, but for household workers, two stand out the most:

 

  1. The permanence of the job. When an employee accepts a job, they will continue to be employed until their employer lays them off, terminates them with cause or they quit. An independent contractor has a set of duties they will perform over a certain timeframe and it's understood that they will leave when the job is complete.

 

  1. Economic dependence. An employee is generally dependent on their job for financial stability. Independent contractors are self-employed so they are providing their services to several different clients at the same time. Losing one client is not ideal, but will not generally cripple their business.

 

"This distinction may be part of the reason why employees are eligible for unemployment benefits if they're laid off due to no fault of their own, but independent contractors are not," adds Breedlove.

 

How taxes differ for household employees and independent contractors

When you hire a nanny, senior caregiver or other household employee, you must give them a W-2 to file their personal income tax return. Independent contractors are given a Form 1099 to handle their taxes. Aside from tax forms, managing a household employee is a year-round process because there are payroll and tax-related procedures to follow. With independent contractors, these tasks are not necessary, which is why some families purposefully misclassify their caregiver.

 

What happens if I give my employee a 1099 instead of a W-2?

Attempting to classify an employee as an independent contractor by giving them a Form 1099 is considered tax evasion in the eyes of the IRS. If you're caught, you'll owe all the back taxes you should have been paying to the IRS and the state during the time you had a caregiver and be subject to additional fines. The IRS, Department of Labor and the majority of states have signed a formal Memorandum of Understanding to share information between agencies in order to combat worker misclassification.

 

Aside from avoiding tax-related headaches, there are more benefits to properly classifying your household employee. You may qualify for tax breaks that can lower your costs and you'll help your caregiver because the paystubs you provide help them qualify for things like car loans and mortgages. And if you're worried about the administrative tasks of filing taxes, HomePay can take these items off your plate so you'll gain peace of mind.

 

Your Next Steps:

 
 
* The tax information contained in this article should not be used for any actual nanny relationship without the advice and guidance of a professional tax adviser who is familiar with all the relevant facts. The information contained herein is general in nature and is not intended as legal, tax or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for your specific circumstances and may require consideration of other matters.

 

87 Comments

Join the conversation

Comment
Placeholder image

AmyF

Hi! I would appreciate some advice. We are planning to have a college student "monitoring" our 2 daughters for 8 weeks during the summer. She will drive them to set activities and create other activities and outings for them to do during the days. It will be only during the summer with no intentions of continuing past the 8 weeks. She will be paid more than $1800 for this time period and I would really like to make it as easy as possible for payment. The agreement is not through an agency, just a basic contract and agreement. I appreciate that taxes need to be paid, but I am wondering if going through a system like HomePay is the best method for such a short period of time she will be with us. Thank you for your time!
May 23, 2015 at 8:20 PM
Placeholder image

Laura

Hi Tom! I am a part-time nanny writing on behalf of myself and would really appreciate any insight that you may have. As of January 2015, I have been working as a nanny part-time but have been getting paid "under the table." My employer expressed no interest or intent on learning on how submit taxes on my behalf, so I took matters into my own hands by submitting estimated taxes (Form 1040) for the first quarter. This means that my employer made no contributions toward Social Security/Medicare; the full 15.3% was deducted directly from my meager earnings. In apprehension of next year's taxes, I would like to educate my employer on issuing a W-2 but was wondering if this would be something that, as an employee, I could manage myself. Of course, my employer must file for a federal ID number. Once this has been accomplished, would it be legal for me to continue submitting quarterly estimated taxes on my behalf and fill in the W-2 myself at the end of the year? I would inform my employer of this decision, of course, and leave it up to them whether they'd be willing to reimburse me for any of the estimated payments. Please help! I cannot think of a more simpler method for filing next year's taxes. I would like to make it as easy as possible for my employer, and do not want to risk them being audited. This is why I have taken responsibility of the matter. Thank you so much. Laura
April 21, 2015 at 12:27 PM
Placeholder image

Sara

Hi, My question is I provide childcare services for my friend in my home, I also provide food diaper, etc.. I set my on hours to work, Am I consider a independent contractor or employee, If I am a Independent contractor and receive 1099 Misc form which box will my total wages have to be reported in Box 3 or Box 7 and will I have to pay my own taxes.
April 16, 2015 at 11:59 PM
Photo of Tom B.

Tom B.

Hey Rebecca. There are definitely aspects of what you described that lean both to employee and self-employed. I will say that the IRS is notoriously stringent on how they view workers in your friend's situation. They tend to lean toward employee most of the time because they say in order to be self-employed, the worker must pass ALL tests of working control. I would suggest taking a look at the following IRS article that details this further. It should help your friend out. (http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee)
April 15, 2015 at 1:02 PM
Placeholder image

Rebecca

My friend just started providing childcare for a family on her block while the parents are at work. The care takes place in her home where she provides all of the supplies save for food. She goes about her regular day, taking the child with her wherever she goes. This seems like self-employment. However, the parents dictate the hours in which she works in the matter that they drop their son off in the morning and come to pick him up at the end of the day, five days a week, and they pay her on a weekly basis, regardless of if she works or how much she works. That seems more like an employee. Which is it? She doesn't want to get in trouble come tax season next year, nor does she want to get the family in trouble.
April 13, 2015 at 3:11 PM
Placeholder image

sinead keating

I know that I am not necessarily hired as self employed??? But do I still qualify for sep ira? If not what is the best way to set up a retirement account? If possible with my family's help and if not just on my own? Was thinking there was a way or a loop with opening a sep account since most employers as a nanny are not open to helping with retirement plan
March 29, 2015 at 8:01 PM
Photo of Tom B.

Tom B.

Hey Jenn B. Based on the few details you provided, it does seem like you could be considered self-employed and thus file taxes as an independent contractor. I would double check some other details on the IRS' website though to make sure you meet all the tests. You can visit the following page to take a look. (http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee)
March 19, 2015 at 12:32 PM
Placeholder image

JennB

I babysit children for different families in my home year round. I am having trouble figuring out which tax form I should be given. I make over $1,900 per year from each family. I decide what time naps are, I feed them food I provide, I pick the kids that need to be up from school. There is so much conflicting information out there! Thanks in advance!
March 18, 2015 at 7:13 PM
Placeholder image

Lanette

I take care of my dad who has Alzheimer's and is now living in my home. I provide all food, room & pay all utility bills. I was working part-time before my dad moved in with our family. I still work some & pay a sitter to stay with my dad. I'm currently paying the sitter out of my dad's retirement income. I need to know if the sitter would be considered a family employee so taxes and a W-2 need to be issued, correct? Also need to know how to charge so much to my dad for everyday expenses or for daily care to help with the added expenses. I have 2 brothers and the estate will be divided equally between the 3 of us, so they don't want me to charge my dad anything for his care to keep him out of a nursing home. I'm not trying to make a fortune off my dad but all expenses are on me and I need financial help to continue caring for him. How will this effect my taxes if I charge him and can his taxes from retirement income still be filed with just him on them & we file our taxes as we have in the past with just our family? Any advice would be most appreciated. Thanks!!
March 03, 2015 at 11:42 AM
Photo of Tom B.

Tom B.

Hey Ashley. I'm very sorry to hear you're having difficulties with your taxes. I would agree with you (and the IRS most likely would as well) that you're a household employee. If the family flat out refuses to comply, your final recourse in order to do your taxes is to file a Form 4852 with the IRS, which is a substitute for a W-2. It allows you to claim your wages and shows the IRS you're trying to pay taxes. Unfortunately when you file the form, it significantly increases the risk that the family will be audited because the IRS will want to know why an employer never gave their employee a W-2. I would explain this scenario to the family and make it clear that it's not your intention to get them in trouble, but you feel it's important for you to be able to file your taxes in the correct manner. If they need help catching up on their household employment taxes, please share this article with them or have them give us a call. (https://www.care.com/homepay/last-minute-tax-tips-for-families-1403201632)
February 23, 2015 at 5:50 PM
Photo of Tom B.

Tom B.

Hey Alexandria. I'll preface this by saying I'm not a commercial tax expert, but based on the information you provided, I think you could be considered "self-employed" which means you could be classified as an independent contractor. I would run this by a CPA to double-check though. Good luck with your business!
February 23, 2015 at 5:45 PM
Placeholder image

Ashley

I need help figuring out my current situation. I was a nanny for a family for 9 months last year and made $9400. I worked the same three days a week for 10 hours each day while the parents worked. I made the kids breakfast and lunch (with their food), got them dressed, drove the oldest to school, brought them to birthday parties, etc. Now that it's time to do taxes, the family is trying to tell me I was an independent contractor not a household employee because I didn't clean their house and ran my own errands with the kids. I can't seem to convince them they are wrong and therefore, I haven't been able to do my taxes. I've emailed them multiple links with information on household employees but I'm not getting through to them and I don't know what else to do.
February 21, 2015 at 11:25 AM
Photo of Alexandria R.

Alexandria R.

I work as a math tutor, a baby sitter, a dog walker, caregiver for the elderly, and a respite caregiver for anyone needing help. I charge anywhere from $12-25 per hour, sometimes with a travel and/or supply fee. I keep running into the issue of being denied credit or being rejected for anything that requires a person to show proof of income. I have so much business that I actually decided to quit my "real" job. The few hours I could work for a traditional employer really don't make a huge impact on my situation. So I did a ton of research on sole proprietorships and single member limited liability companies versus multiple member LLC and whether or not to be treated as a corporation. I've gathered that I need to be very careful about not mixing my personal finances with my future business finances. So I want to create a situation in which I provide $1500-2000 worth of services a month. Then place those monies into a business account and once a month on the same day, formally pay myself my portion of the profits with an actual business check. I've spoken with a friend that is willing to take on a little bit of the marketing aspect of my service business. So we decided on setting up a manager-managed two member LLC, in which I own 97% and make all decisions exclusively and he owns 3%. Early on my intuition led me to conclude that this nanny business felt financially wrong on paper. I have an advance accounting background from being a tech prep high school student. My question: At the point that we decided to register with the state, will I be riding any fine lines by stating that my business is a consulting company that services individuals and companies in the market for contracted services from various health, wellness, academic, janitorial and business professionals both licensed and unlicensed? Here's my idea... I am the owner/manager/ and "employee" right now. My friend is just an extra name on the paperwork so that I can reduce my chances of being audited (I'm still learning how all of this works which necessitates potential errors in learning the business owner tax ropes). But maybe in the future, I want to hire someone to take my calls and schedule appointments, then hire two employees to do the work that I do now. I am also close to breing able to sit for my MT license, so I know that I will definitely hire LMTs in the future. (At the point where I have the license, I know that my state requires me to register my business as a PLLC. But I'm not concerned with that starting up because I don't and can't legally work as an MT.) I would be the one giving out the W-2s to these extra hands. At this juncture or even after filing the paperwork but before hiring others, am I considered an independent contractor if I start this LLC? Am I missing anything critical and blatant?
February 21, 2015 at 2:25 AM
Photo of Tom B.

Tom B.

Hey Amy. I'm very sorry to hear you're having difficulties with this matter. Unfortunately many tax preparers are not experienced in handling household employment payroll and taxes because so few of their clients have nannies. When they give incorrect information to the families they're working with, it can cause situations like yours to occur. What I would do is ask the family to show their tax preparer IRS Publication 926 which is the section of the tax code that covers household employment. It will become very clear to him/her that a W-2 is what you need to have instead of a 1099. I wish you the best of luck in correcting this mistake.
February 18, 2015 at 5:43 PM
Photo of Amy S.

Amy S.

I need some advice on how to handle my current situation. I started working for a family back in August providing before/after school care & tutoring for one child and had a nanny contract notarized before my employment started. The contract stated the hours I was expected to work, the tasks I was expected to complete, my monthly salary, among other conditions of my employment. Now that it is time for me to complete my taxes, my employer is stating that she doesn't have to give me a W2. The individual that is completing the family's taxes told my employer that she did not have to file for an EIN, nor did she have to provide me with a W2, because I did not live in the household with them or make over $17,000 during the 2014 tax year. I have provided her with several links from care.com regarding the laws on the nanny tax and other general tax information for employers. However, just this past week, my employer ordered a 1099 form from the IRS and is insistent that I am not a household employee, but rather an independent contractor even though I made over $1,900 from her in the 2014 tax year. Without causing more tension between my employer & myself than I already have, how do I go about making sure I get a W2 & can file my taxes the correct way?
February 14, 2015 at 12:44 PM
Photo of Tom B.

Tom B.

Hello Emely. There are several articles on Care.com that can help you with the aspects of being a nanny and they're all archived here (http://www.care.com/advice-for-babysitters-and-nannies-p1387-q18953197.html). As far as the taxes go, if you earn $1,900 or more working for a family, you'll need to have Social Security & Medicare taxes withheld from your pay. I would also suggest having federal and state income taxes withheld as well (assuming you live in a state with income taxes) so you don't have to worry about paying these on your own. When tax season rolls around, the family should provide you with a W-2 so you can file your personal income tax return. I wish you the best of luck with your nanny career.
February 10, 2015 at 11:03 AM
Placeholder image

Emely H.

I want to become a nanny. How do I go about the whole tax situation? I always work with agencies but I don't know to go about this on my own.
February 09, 2015 at 3:57 PM
Photo of Tom B.

Tom B.

Hey Traci. Great question. This definitely doesn't seem like a employer/employee relationship between the sitter and the individual family because the sitter is being dispatched by the service. Based on the information you provided, it seems like the sitters could be true independent contractors.
February 02, 2015 at 6:12 PM
Placeholder image

Traci C.

Asking for a friend of mine - if someone runs a babysitting service and does most of the child care for themselves but hires sitters to work on an as needed basis is this considered an independent contractor? Sitters aren't required to commit to any specific schedule (only follow through if they accept a job offered). Sitters may work anywhere from 0 - 40 hours a month. They're paid by the company an hourly rate for hours worked. They are encouraged to represent the company in the same way as is described on the website but the owner does not dictate how their evening will go. Any specifics such as driving the children and the children's routine is decided between family & sitter. the company does run background checks on independent contractors and confirm their references given the sensitivity of a job involved with working with children. Is my friend rightfully hired as an independent contractor?
January 29, 2015 at 4:24 PM
Photo of Tom B.

Tom B.

Hey Manu. Unfortunately if you've already paid 2013 taxes, it's highly unlikely you'd be able to recoup the FICA taxes that should have been paid by your employer. For 2014, it's not too late for the family to make things right. There's a lot of work to do, but please pass along this article to them and let them know HomePay can help them out. We catch families up on their tax liability all the time during tax season. (https://www.care.com/homepay/last-minute-tax-tips-for-families-1403201632)
January 27, 2015 at 4:41 PM

Leave a comment

You can post a comment by logging in to your Care.com account or continue as a guest below.