Are you one of tens of thousands of Americans who employs a service provider in your home? Perhaps you have hired a nanny, babysitter, cook, maid, or a personal health care assistant. Depending on the details of his or her employment, you could face tax withholding and reporting obligations under the so-called nanny tax.
If you believe you may owe back taxes as a result of the nanny tax or any tax issues you may need Boca Raton tax debt help. Don’t wait to contact an expert, as back tax debt only grows if you fail to address it as soon as possible.
The Factors Used by the IRS to Determine a Worker’s Classification
When families hire someone to work in their home, for example as a nanny or housekeeper, they don’t generally consider the potential tax obligations of having an employee. Why? Because of the belief the workers are classified as independent contractors and thus responsible for their own taxes.
The Internal Revenue Service looks at different factors to help determine who is an employee and who is an independent contractor. Generally, an employer/employee relationship exists if the employer has the right to direct and control the worker’s performance, not only as to the result to be accomplished by the work, but also as to the details and means (i.e., the methods) by which that result is accomplished. The employer need not exercise this control as long as the employer has the legal right to do so. Neither titles, nor full-time or part-time status, is determinative of the worker’s status.
When determining a worker’s classification, the IRS focuses on three categories of evidence, each of which exemplifies a particular aspect of control:
- Behavioral Control – Whether there is a right to direct or control how the worker performs the specific task for which he or she is hired.
- Financial Control – Whether there is a right to direct or control how the business aspects of the worker’s activities are conducted. Significant investment, unreimbursed expenses, services available to the relevant market, method of payment, and opportunity for profit or loss are the factors relevant to financial control.
- Relationship of the Parties – How the parties perceive their relationship. Intent of parties/written contracts, employee benefits, discharge/termination, permanency, and regular business activity are relevant to how the parties perceive their relationship.
Generally speaking, an independent contractor is self-employed, working for him or herself. An independent contractor usually provides services to a number of different clients.
Employees usually receive most or all of their income from one employer. Employees may or may not work under a written contract, and could receive employee-type benefits, like vacation, sick days or health insurance.
Example: Brandon pays Isabella to babysit his child and perform housework four days a week in his home. Isabella follows Brandon’s specific instructions about household and child care duties, and Brandon provides the household equipment and supplies that Isabella needs to do her work. Isabella is Brandon’s household employee.
Brandon also pays Nicholas to care for his lawn. Nicholas offers lawn maintenance services to other homeowners in town, provides his own tools and supplies, and hires and pays any helpers he needs. Neither Nicholas nor his helpers are Brandon’s household employees.
Worker classification is important for more than just tax reasons obligations, as employees may also be entitled to things like workers’ compensation and other benefits not afforded to an independent contractor.
So when do you need to start thinking about tax obligations for your in-home worker? In 2016, the threshold amount is $2,000. If you pay your nanny or housekeeper $2,000 or more over the course of the year, you need to withhold and pay Social Security and Medicare on all of his or her wages. In addition, you can withhold income taxes from your household employee if requested by the employee. Depending on how much he or she makes quarterly, you may also owe federal unemployment taxes and/or state unemployment taxes.
If you have questions about the nanny tax or need help resolving a tax debt problem, contact East Coast Tax Consulting Group, LLC to schedule a consultation.