What are the risks of misclassifying household staff?
Is your nanny an employee or a contractor? And what happens if you get it wrong? Don’t put yourself or your household employees at risk.
Are you paying your babysitters cash wages? How about your housekeepers? If you’re paying your household employees off the books, you could be facing serious legal and financial risks.
Not only can misclassifying your household employees lead to trouble with the internal revenue service, it can also affect your career, your social life, and your relationships with the household workers who are dedicated to helping make your life easier.
Here’s the good news: Correct household employment classification is simple, quick, and safe. Putting in a small amount of effort now to make sure you’re paying your employee’s wages legally, and handling your tax payments correctly, can save you a giant headache in the long run.
How can you tell the difference between an independent contractor and an employee?
There are several crucial differences between a contractor and an employee. Most of the reasons center around control: Who makes the decisions about what work is accomplished and how and when it’s done?
If they bring their own tools, set their own hours, and tell you how they want to be paid, they are probably a self-employed contractor. Plumbers, A/V technicians, repairmen, and other household vendors usually fall into this category.
If you can control a household worker’s role and responsibilities, including their schedule, tasks, supplies, equipment, and methods, then they are an employee. Whether they’re full-time or part-time, if they work for you alone (or mainly you), and you have an ongoing relationship, it’s likely that your worker is an employee.
Most household workers are, in fact, employees. In addition, The Department of Labor will assume your domestic worker is an employee unless you can prove otherwise, which is difficult.
Classifying anyone doing household work as a self-employed worker seems like it saves you money, because you don’t have to pay employment taxes, medicare taxes, etc. But classifying them as an employee from the start will save you grief and frustration — and prevent the risk of severe financial losses.
How can you tell the difference between a household employee and an office worker?
Another common misclassification is calling a domestic employee an office worker. Although some household employees may have similar roles to someone who works in a small business, and both roles may serve to support your career, the workers’ comp insurance can be different for household employment in some states.
Sitting at a desk is less dangerous than climbing ladders, dealing with hot oil and sharp knives, driving a car, or chasing a toddler. So your workers’ comp insurance might cost more for yard workers, caretakers, and childcare providers than it costs for executive assistants.
Misclassification of domestic employees as office personnel is illegal. It might save a little money in the short term, but it’s also dangerous.
How would anyone find out that you misclassified your employee?
This can happen any number of ways, but one of the main risks is that your employee will be injured or get seriously sick on the job. If he seeks to have his medical costs covered, or wants to be paid while he recovers (which is reasonable), you could face trouble.
If you have workers’ comp insurance with sufficient coverage, then the workers’ comp claim will likely cover the medical costs and lost wages. Without sufficient coverage, you’re personally on the hook for the medical costs, which can be astronomical, as well as the lost wages, which can be lifelong.
The misclassification could also be exposed if your employee reports his earnings to the IRS as wages, or if they file for unemployment or social security. If you haven’t been paying federal unemployment tax, state unemployment tax, social security tax, or other household employment taxes, you could be facing major fines.
What happens if you misclassify your household employee?
If your employee makes a workers’ comp claim, it will be discovered that you don’t have a workers’ comp policy (or don’t have a sufficient policy) because you misclassified your employee. That can open you up to penalties if your state requires workers’ comp for domestic employees.
Worse, if you classified your worker as a contractor, the workers’ comp claim or accurate income tax return will reveal that you didn’t pay household employment taxes. Then, you are liable for back taxes, plus interest, along with additional penalties.
The worst-case scenario is quite serious. You could be charged with tax fraud. This could lead to prison time, hefty monetary penalties, the loss of a professional license, social repercussions, and a permanent criminal record.
The dangers are too great. Classifying your household employee as a household employee is the best and safest way to protect your finances and your future.
Does household employment misclassification hurt your employee directly?
Misclassification puts you in danger, but it also deprives your employee of many advantages.
Without worker’s comp insurance (or with only partial coverage), he could be in trouble if he experiences a health problem caused by his job.
If you don’t properly classify him as an employee, he can’t benefit from unemployment, Medicare, or social security. This will seriously disadvantage him when he reaches 65, if he needs healthcare when he’s older, or if he is ever unemployed.
Correct classification helps you and your employee. It grants your employee rights and benefits, and it saves you from paying significant costs.
Want to manage household employment legally — without the effort?
Handling household payroll and taxes legally helps both you and your employees. Paying household employment taxes ensure your employees have access to important government benefits, like medicare, unemployment and social security. Federal income tax withholding helps your employee at the end of the tax year, so they don’t have to plan and save for tax season.
Collecting the information and completed forms you need to manage your household employment and household payroll legally may sound like a lot of work. (Do you need a form w-2 or a form w-4? How can you safely store your household employees’ social security numbers?) But here’s the good news: it doesn’t have to be.
Paying your nanny legally is easy with our partner HomePay. They facilitate nanny payroll in three simple steps:
- Customized payroll process. Set up a pay cadence that works for you, and they’ll onboard your employees to save you time.
- Tax returns filed automatically. They prepare your quarterly and year-end taxes – filed on-time, every time. Guaranteed.
- Unlimited access to experts. Contact their award-winning tax, payroll & HR specialists to have your questions answered quickly and accurately.
That’s it! Get started today.