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

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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
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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
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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
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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
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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

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