1099 vs. employee: Why the difference matters when you hire a caregiver
Learn why your nanny or senior caregiver is an employee, not an 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:
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.
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.
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* 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.