In today’s world it is common to have domestic help; from gardeners and housekeepers to nannies and home health care assistance. The question is, when does this situation turn into an employer and employee relationship and what are the filing requirements and regulations to follow?
Independent Contractor or Employee?
There is a strong lean towards Employee vs Independent Contractor. For individuals in California, AB 5 is the regulation that applies to determine the classification. Generally speaking, a household worker is considered an employee if you control what work is done and how it is done.
State and Federal Department of Labor and tax agencies have various regulations regarding domestic employees. Some cities have their own regulations as well, so it’s important to research your area. These laws can determine when you need to have a written contract and when you need to issue a W2 for their pay.
Pay & Filing Requirements
According to the IRS, if you pay a domestic worker (an individual – not a corporation or service company) in 2021 over $1,000 in any calendar quarter or $2,300 in the calendar year, you are required to file a Schedule H (2022 limits are increased to $2,400/year). Schedule H will calculate the employment taxes due and include them on your 1040 filing. You will also need to issue a W2 to that employee showing the employment taxes were paid.
The FICA reporting threshold for 2021 is $2,300 ($2,400 for 2022) to any individual in a calendar year. The Federal Unemployment Insurance threshold is $1,000 in a calendar quarter to all employees combined.
Benefits for the employers (and employees)
Expanded savings from Dependent Care Tax breaks and FFCRA in 2021 make claiming a child care worker (nanny) as an employee an advantage for these special credits. If the care is medical in nature (i.e. care for an aging relative) the wages could qualify as a Medical Expense Deduction (IRS Pub 502).
There are benefits to the employee as well. We have seen various stimulus payments in the last few years based on wages, unemployment benefits, social security, and having a paystub can help them qualify for health insurance (required in California) and various personal loans.
Workers Compensation is based on the state requirement. For California, workers compensation is required for household employees, but it can help protect the employer from liabilities.
To discuss your nuanced situation or help you get into compliance, please reach out to a member of our team.
Dana R. Borys, an Accountancy Corporation is a boutique tax consulting, compliance, and representation firm working with affluent individuals and owners/officers/founders of start-up/emerging growth companies. Building connections beyond the code.