Taxes and Hiring Household Workers

Taxpayers may find themselves in unfamiliar
tax filing and withholding situations.

Many taxpayers are finding themselves in unique situations due to the Covid-19 pandemic. Many schools across the country closed and shifted to virtual learning. Businesses also sent employees home to work remotely. Parents often found themselves having to split their time between homeschooling their children and trying to work from home. In some cases, learning pods became an option where a small group of children shares a learning space and a pod instructor. With daycares closing or only being available for essential workers, many parents hired nannies for the first time.

These types of hiring arrangements often put taxpayers in unfamiliar tax filing and withholding situations, which could lead to unexpected tax liabilities or penalties. It is important to understand the tax consequences of hiring a household worker, including whether a worker is treated as an “employee” or an “independent contractor” for both federal and state reporting.

Employee or Independent Contractor?

If you are one of the many who hired a household worker, you need to determine whether a pod instructor or nanny is an employee or an independent contractor. Consider the degree of control you exercise over the pod instructor or nanny.

To assist in making this determination, the IRS lists 20 factors for taxpayers to consider. To simplify the analysis, the IRS has grouped these factors into three categories in IRS Publication 15-A, Employer’s Supplemental Tax Guide:

Behavioral control
Financial control
The relationship between the parties

A worker is considered an employee if you retain the right to control what work is done and the way it is done. For example, you may direct an employee to work on a certain schedule and specifically instruct the worker on how to perform his or her work. By contrast, an independent contractor retains substantial control over the manner and means through which a service or product is delivered.

When applying the IRS factors to a nanny or a pod instructor based upon the specific facts, a nanny most often is an employee; whereas, a pod instructor is more likely to be an independent contractor. This is because parents typically establish specific constraints or instructions that the nanny operates within, such as scheduling, day-to-day activities, and disciplinary methods. Meanwhile, pod instructors generally retain instructional control over the learning environment in terms of what is being taught and how.

Results can vary depending on the circumstances. For example, you cannot rely on this rule of thumb if your nanny has more autonomy or pod instructors are micromanaged. Along the same lines, a tutor hired to provide supplemental instruction in a subject like algebra or chemistry would generally be treated as an independent contractor.

Examine who sets the schedule, who provides the educational and childcare materials, and how specifically you manage the details of your nanny’s or pod instructor’s work. The more control you exert over the arrangement, the more likely the worker is an employee. After considering and applying all the factors to the situation, you will need to decide whether the nanny or pod instructor should be classified as an employee or an independent contractor. Each situation may be different. For example, if a pod instructor or nanny provides their services through a company, the company is usually considered the employer, not you.

Like parents, pod instructors have an interest in how they are classified, as their classification will generate differing tax consequences for themselves. State taxing authorities may have specific rules that should be considered as well. Parents and pod instructors who want more certainty can seek assistance from the IRS in determining worker classification by completing and submitting Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. This process can be quite long and burdensome. However, receiving an official decision, although delayed, may help resolve disputes between parents and pod instructors.

Tax Consequences for the Parents, Nanny, or Pod Instructor

It is critical for taxpayers to carefully consider their particular facts and circumstances. There is no one-size-fits-all answer.

If you conclude your nanny or pod instructor to be an independent contractor, you should keep careful records and receipts of all amounts paid. Independent contractors are responsible for paying all self-employment taxes and properly filing their returns.
If you conclude the nanny or pod instructor to be an employee, you will need to consider how to file the necessary forms with the IRS and withhold and pay the required taxes.

Here are a few key things to do immediately:

First, apply for an Employer Identification Number (EIN), which should be included on all future filings with the IRS.

Second, determine whether you meet the threshold requirement to pay employment taxes.
- For 2020, if at least $2,200 in cash wages is paid to a household employee, they will need to pay Social Security and Medicare taxes.
- For any calendar quarter in 2019 or 2020, if at least $1,000 in cash wages is paid to a household employee, they will need to pay federal unemployment taxes.
Check with your state of residence regarding requirements and procedures to pay state unemployment tax.
Next, discuss whether you, as the employer, will withhold and pay the taxes or whether the employee will pay the taxes. If you will withhold, the employee will need to submit a Form W-4, Employees Withholding Certificate, to you, the employer.
- In general, payroll taxes are calculated as 15.3 percent of pay, with 7.65 percent paid by the employer and 7.65 percent withheld by the employer from the employee’s wages.
- Withheld federal income taxes can be calculated using a completed Form W-4.
You should also check state law to determine whether you are required to obtain worker’s compensation insurance through a private carrier in case an employee is injured while working.

Once the Tax Year Ends:

You will need to file a Form W-2, Wage and Tax Statement, with the IRS and a Form W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration.
Give the Form W-2 to the employee by January 31.
During the tax filing season, you will need to complete and file a Schedule H, Household Employment Taxes, with your returns, which will be used to calculate the household employment taxes due to be paid by April 15.

A Final Note

On top of everything else we are dealing with during this time, tax requirements are likely not foremost in the minds of most taxpayers. If you are a household employer and are uncertain as to how to navigate the tax maze, contact your local tax professional. Remember, documentation is imperative. Retain copies of all documents and receipts.

Stay safe. Stay well. Stay home.

Bayshore CPA’s, P.A. are your local Certified Public Accountants

and Tax Resolution Specialists conveniently located

in Mooresville, North Carolina

Source: National Taxpayer Advocate Blog, “What are the tax consequences for parents and workers hired to help with remote learning or childcare?”, November 6, 2020.