Is a private service professional a contractor or an employee?
Is your nanny an employee or a contractor? Knowing the difference — and paying them correctly — can help you save money and avoid risk.
Private service professionals pose an interesting case for employment laws. Many or most household workers are legally considered domestic employees, but they’re sometimes miscategorized as independent contractors. Figuring out the right category is helpful for you and anyone who works in your household.
For you as an employer, these differences answer an important question: Do you need to pay taxes on your worker’s wages? Correctly labeling your employee and paying the related taxes helps prevent tax evasion charges.
For the people who work in your household, categorizing them correctly has meaningful financial implications. Let’s say your housekeeper is categorized as an employee. With a clear record of pay stubs, she can qualify for a car loan, mortgage or credit card. Your employees keep your household running — so it’s important to pay it forward and make sure they have the ability to live comfortably, as well.
So, how do you figure out whether your nanny, housekeeper, chef, etc. is an employee or a contractor? There is no one-size-fits-all definition of an “employee.” But there are three simple tests you can apply to decide whether your staff member should be treated as an employee, which we’ll explore below.
The simplest way to put it is this: Who decides how and when the work is done? If the worker sets their own hours and uses their own methods and supplies, then they are likely an independent contractor. If you control the professional’s schedule, give specific instructions and provide supplies, then they are likely an employee.
Overall, it’s about which party determines what the job looks like on a day-to-day basis.
The three tests: Is your private service professional an employee or a 1099 contractor?
To break it down further, the IRS provides three tests that you can apply.
1. Behavior or methods
Can you decide how the professional accomplishes her job? For example, can you tell your butler to organize the wine cellar differently? Can you tell your nanny to reprimand your children differently? If you can, they are probably employees, since you control how they work.
Do you determine the worker’s hours, or do they offer their available times? Imagine if your nanny worked on her own schedule and didn’t cover the specific hours you need childcare. This would pose problems for your professional or social obligations! (Nannies are almost always employees.)
2. Finances or expenses
If you provide the physical and/or digital resources needed to do the job, you are likely an employer, not a client. Do you have a driver who provides transportation in his own car? He is possibly a contractor. Or do you have a chauffeur who drives a car you provide? He is likely an employee.
If the worker tells you how to pay him, such as by check or digital payment, then he may be an independent contractor. If you determine the method of payment, such as direct deposit, then you hold more control over this aspect. In that case, you may be responsible for employer duties.
3. Type of relationship
If you offer benefits, like PTO, then it is probably an employer-employee relationship. If the relationship is intended to be a long-term arrangement, that is also a good sign.
Another crucial factor is whether the professional offers service mainly to your household or offers service to the general public, too. A pool service provider may come to your home once a week to care for your pool, but between visits she may provide service to many other households. In that case, she would be an independent contractor.
Determining the result: Employee or contractor?
If you apply these tests, the results may not land 100% in either direction. You can simply note the category that fits the majority of your answers. If you are still unsure, you can ask the IRS to determine the worker’s status for you, using Form SS-8.
Legal and tax responsibilities of a household employer
If your worker is in fact a contractor, your responsibilities are limited. You do not even need to provide a 1099 form at the end of the year, because household workers are exempt from the 1099 requirement. But if your worker is an employee, then you will need to pay social security taxes, income taxes, Medicare taxes, and unemployment taxes. Your accountant or payroll service will need to give your household employee a W2 no later than January each year.
Your employee must also earn at least minimum wage, and depending on your state, you may also need to provide worker’s comp insurance as well. Another responsibility is paying your domestic employee overtime wages (1.5 times the regular rate) for overtime hours.
These responsibilities benefit both you and your employee. They give you legal protection and a clear record of ethical treatment, and they provide kind and respectful treatment to your employee. This leads to higher job satisfaction, improved employee retention and more successful employer-employee relationships.
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