Business owners have a lot to manage making sure all aspects of their company run smoothly. So when they need to hire a nanny, senior caregiver or other type of household employee to work in their home, it’s understandable to think this new worker could simply be added as another business employee. In actuality, this is a common tax mistake that could impact both your company’s finances and your own.
“The IRS is very clear that families need to keep their household employment activity separate from their business endeavors,” says Tom Breedlove, Sr. Director of Care.com HomePay. “That means separate payroll accounts and filing different tax returns.”
Why does the IRS want household employees kept off of business payroll?
Businesses are allowed to take tax deductions on the payroll of employees that contribute directly to the success of the company. The IRS does not view nannies, senior caregivers and other household employees to be direct contributors to the success of a business. Therefore, any wages paid to a household employee cannot be reported on a business tax return and any tax deductions taken on these wages are illegal.
How can business owners get a tax deduction from hiring a household employee?
Instead of paying a caregiver through their company’s payroll and taking a business tax deduction, families should pay them through their personal bank account and take a personal tax deduction on their federal income tax return. This is usually done by enrolling in a Dependent Care Account offered by most workplaces and/or taking the Child and Dependent Care Tax Credit when completing their tax return.
Are there any other issues with putting a household employee on company payroll?
Often, employees of a company are offered health insurance as a benefit. If a household employee is added to a business’ group health insurance plan, it’s possible that the insurance provider will deny any claims made because these plans don’t generally allow personal employees to be added. Instead, a household employee should have their own personal policy and families are welcome to make contributions to the plan as part of their employee’s payroll.
Household employment is similar to commercial employment, but subtle differences in how the IRS wants you to manage each case is important to understand. That’s why consulting with an expert like HomePay during the hiring process is worth a few minutes of your time. We’ll make sure you’re in compliance with all federal, state and local tax, labor and payroll laws.