One of the most common calls that we receive is from families who are about to start with a nanny or who have had a domestic employee for a short period of time wondering when tax and labor issues need to be addressed. This question comes in many forms:
* ”When do I need to pay my nanny on the books?”
* ”At what point is my employee a ‘real’ employee?”
* ”When do I need to make my caregiver arrangement ‘official’?”
* ”How much does my employee need to earn before I have to worry about taxes?”
Some speculate that a probationary period allows them to delay addressing tax and labor requirements. Others believe that a certain amount of wages need to be paid before tax and labor laws become a consideration. And some believe they never need to worry about taxes or labor laws due to the nature of their employment arrangement.
The answer to these questions can be surprising: in most cases, tax and labor laws need to be addressed as soon as you make an offer to your household employee. (It’s worth mentioning that many of the same fair hiring laws and interview requirements that exist for non-domestic businesses still exist for households – in other words, as soon as you decide to become an employer and start interviewing, there are legal issues to consider, but the interview/hiring process extends beyond the scope of this particular article).
Once you’ve found the right candidate and are ready to make a job offer, you should have new employee paperwork ready. Within 3 business days of starting work, the employee must complete an I-9 form along with providing the required government documents so that the employer can confirm the employee’s identity and eligibility to work in the United States.
In addition to the I-9 form, an employee will also need to complete a W-4 so the employer can determine how much income tax to withhold from the employees’ wages. There may also be state and/or local tax forms related to the employees’ tax withholdings/work status that a new hire must complete. An employer may have other internal forms for the new employee to complete/sign prior to starting work with both practical and legal implications (direct deposit form, emergency contact information, employment agreement, etc).
In addition to collecting the proper paperwork from the employee, the employer has a series of steps they need to complete as well (luckily, NannyChex handles most of these items for our clients as part of our free set-up!):
-Report the new hire to the state (each state has their own system for reporting new hires and requirements for how quickly an employee must be reported)
-Establish an EIN
-Set-up a payroll/tax withholding system so the wages can be calculated, taxes withheld, and both can be reported to the proper tax agencies on the appropriate schedule and reflected on year-end tax forms
-Review state workers’ compensation insurance requirements and obtain coverage if required/desired
-Review state disability insurance requirements and obtain coverage if required/desired
-Review state/federal laws to ensure employer is in compliance with details like pay frequency, overtime treatment, minimum wage, etc.
-Establish state/local employer tax accounts (account types and requirements vary by location)
-Posting required notices/posters
An unfortunate reality of earning income in the United States is that it’s taxable. How and when it’s taxed can be confusing, especially for household employees. The most common source of confusion is Social Security and Medicare (FICA). Domestic employees do not need to have Social Security and Medicare withheld unless they are paid $2000 in a year; unfortunately, once that $2000 threshold is met, the taxes must be collected on ALL wages back to dollar 1. Accordingly, we recommend withholding FICA starting with the first pay check – it’s always easier to refund taxes that were erroneously collected than discovering your employee earned more than you expected and you need to collect back taxes. As far as income taxes, technically, all income is taxable, and household employees, regardless of how much they earn, must report their wages and pay taxes. Household employees can elect not to have state and federal income taxes withheld from their paychecks (this would be communicated on the W-4/state version of the W-4) – it is important to note that even if the employee does not want income taxes withheld by their employer, they are still responsible for paying income taxes on their earnings. If no income taxes are withheld/remitted by the employer, the employee would need to make estimated tax payments on their own or they would be responsible for paying their taxes on their year-end tax return. There may be additional state and/or local taxes that must be paid in addition to FICA and income taxes as well. If an employee elects to not have income taxes withheld, they are still subject to mandatory FICA withholdings (if they earn more than $2000) and state/local tax withholdings as well. A household employee should receive a W-2 from their employer which will reflect the wages paid and taxes withheld during the year, and that W-2 will be used by the employee in the preparation of their individual tax return.
In the eyes of the law, including local, state, and federal tax agencies, tax and labor protections and provisions must be addressed once the employee is hired. Over the course of the employment, there are increasing requirements for employers, which often kick in more swiftly than employers realize. Employers are wise to know their obligations in advance and to be prepared to address their requirements in a timely manner. In most cases, the wisest approach from both a practical and legal perspective, is to address all tax and labor issues in the beginning – when the employee is hired, when they start work, and on their first pay check.