Federal payroll taxes include Social Security tax (FICA), federal unemployment taxes (FUTA) and federal income tax withholding (FITW). You don’t have to pay or withhold any federal payroll taxes for household workers who are ICs. FICA and FUTA must be paid for employee household workers whose salaries exceed certain amounts.
You need to apply the IRS test discussed in Federal Taxes and the IRS Rules to determine if a household worker is an IC or employee for federal payroll purposes. Under this test, a worker is an employee if you have the right to control how the worker performs the services. It’s highly likely that any full-time household worker would be viewed as an employee under this test—you’ll have a very hard time convincing the IRS you don’t have the right to control someone who works full-time in your home.
However, it is possible for part-time household workers to qualify as ICs under the test. The key is that the worker must be running an independent business.
EXAMPLE: Anne hires David to clean her house every two weeks, a task that takes him about two hours. David has 20 clients in addition to Anne, provides his own cleaning equipment and ordinarily does the cleaning work when Anne is not home. Anne has the right to accept or reject the results David achieves in cleaning her home, but she does not supervise how he does the work. David is likely an IC under the IRS test.
Part-time housecleaners, cooks, chauffeurs, housekeepers, gardeners, caretakers or maids may qualify as ICs under the common law test, but it seems likely that in-home child care workers would not, even if they only work part time. Even the most callous parent would probably insist on having the right to control how a babysitter, nanny or similar worker cares for his or her children. Undoubtedly, most parents actually exercise this right. The only exception might be where you obtain the worker through an agency (see below). In addition, child care workers who provide care outside your home can be ICs.
a. The IRS Safe Harbor
Even if a household worker is an employee under the common law test, you won’t have to pay employment taxes if you qualify for Safe Harbor protection. To qualify, you must satisfy two requirements:
- You must never have treated any worker performing similar services since 1977 as an employee for federal tax purposes; for example, if your household worker is a nanny, you must have never done any of the following for that worker or any other nanny you’ve hired since 1977: (1) withheld federal income tax or FICA tax from the worker’s wages; (2) filed a federal employment tax return for the worker on IRS Form 942; or (3) filed a W-2 Wage and Tax Statement for the worker, whether or not tax was actually withheld.
- You must have had a reasonable basis for treating the worker as an employee. The most likely basis would be that the classification is a recognized practice of a significant segment of the worker’s industry. After all, treating household workers as ICs has long been a common practice. However, as a practical matter, it can be hard to convince the IRS or courts that you have a reasonable basis for your IC classification. Moreover, as a result of the special payroll tax rules for household workers enacted in 1995 , it’s likely that many household workers are now being treated as employees, making the common practice argument harder to prove.
1099s Not Required for Household Workers
You don’t need to file 1099-MISC forms reporting to the IRS your payments in excess of $600 to household workers. This is because 1099s need only be filed when your hire a worker to work in your business. They need not be filed when you hire someone to work in your home for non-business purposes—for example, to clean your home.
b. Workers obtained through agencies
Generally, household workers obtained through an agency are not your employees if the agency is responsible for who does the work and how it is done. A babysitter you hire through a placement agency to come to your home to care for your child is not your employee if the agency sets and collects the fee, pays the sitter and controls the terms of work—for example, provides the sitter with rules of conduct and requires regular performance reports. The agency is the sitter’s employer, not you.
c. Independent contractor agreements
It’s wise to have IC household workers sign independent contractor agreements before they start work. The agreement should make clear that the worker is an IC and you have no right to control the means and manner in which the work is performed—only the final results.
Unfortunately, because many household worker relationships are informal, it may be difficult to get the worker to sign such an agreement. Do the best you can. It may be helpful to point out that such an agreement benefits the worker as well as you because it helps prevent possible disputes by setting forth the worker’s duties and your payment obligations.