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Navigating the Hiring of Domestic Household Help
By Nancy B. Crowley, CPA
For many families, the need to employ domestic household staff increases as their assets grow.Daily living becomes more complex. You may be working long hours at your business or job, need help with child care, own multiple residential properties, or need assistance with caring for an older family member. At some point, you may find yourself needing or even just wanting assistance with your responsibilities at home.Hiring a house cleaner, landscaper, nanny, personal assistant, or any other domestic worker may provide you with that needed support.It can also be a major challenge. Where do you find the right person for the job?Your two options are to go through an agency or to hire directly. Both options should be considered as each has its advantages and disadvantages.
Domestic Help Agencies:
If you are busy and do not have the time to hire help on your own, consider using an agency.The advantage of going through an agency is that the tax, legal, and insurance requirements often are taken care of by the agency. In addition, the agency may already have several available and qualified candidates. An agency will have screened their candidates by checking references, criminal histories, driving records, and confirming that the candidates can legally work in the United States.
The primary disadvantages to using an agency is that it can be considerably more expensive depending on the amount and type of service needed. Also, keep in mind that you will be contracting with the agency; therefore, you need to carefully review the agency’s agreement.You must understand the services as well as the protection provided by the firm. Pay close attention to the indemnity provisions. You may want to have an attorney review the contract.
As a starting point for locating an agency, we recommend Googling “household help agencies” in your area.Additionally, we recommend you speak with people who have had successful experiences hiring employees through an agency.
The prime advantage of hiring the candidate on your own is that it will be less expensive. The tradeoff is that you take on the requirements and responsibilities that would have been those handled by an agency.
To start the hiring process, you need to advertise the position, review applicants’ resumes, conduct interviews, contact personal and professional references, and complete a thorough background check on the candidates under serious consideration.
Once you have found the right person, you must decide how you are going to pay your household employee. Payment for services has two distinct components, with the first component being the form of payment. The employee may ask to be paid in cash or what is otherwise known as “under the table.” The consequences of paying under the table or not reporting the household employee’s earnings include: tax evasion charges; repayment of back taxes with penalties and interest; liability for the employee and employer portions of Social Security and Medicare taxes; and, in some cases, loss of a professional license. You may question how the tax authorities could learn you were paying your household help under the table. Here is a prime example:
Suppose you have paid a housekeeper working for you in Massachusetts under the table and because you are relocating permanently to Florida, you no longer need the housekeeper’s services and employment is terminated. The housekeeper then goes to apply for unemployment benefits and it is determined that you, his or her previous employer, never filed tax returns or paid into the Massachusetts Department of Unemployment Assistance.Your housekeeper is denied unemployment benefits and you are now a prime candidate for an audit.
The second component of payment for services requires you to determine whether the applicant is classified as your employee or as an independent contractor. In nearly every case, household workers are employees and not independent contractors. This is due to you directing and controlling how the work is to be done. If you have an employee, then you become the employer.
An employer has several responsibilities:
1.) Department of Homeland Security Form I-9, Employment Eligibility Verification: You and the employee must complete the Department of Homeland Security Form I-9. The employee must provide identification documents proving that he or she is authorized to work in the United States. The form does not have to be submitted to a government agency, but it must be available upon notice from an authorized government official.
2.) Employer Identification Number (EIN): You will need an EIN to file Form 1040 Schedule H - Household Employment Taxes. This is a schedule which is included with the filing of your individual tax return to report household employee taxes. You also need the EIN to file annual Forms W-2 and W-3 reporting the wages paid to your employee. The EIN is a separate IRS identification number and you may not use your Social Security Number. You can get an EIN by telephone, mail or online.
3.) Social Security and Medicare Taxes: If you pay cash wages of $2,000 or more to a household employee, you, as the employer, are responsible for Social Security and Medicare taxes. The employer is responsible for paying both the employer and the employee taxes, which amounts to 15.3% of wages. As the employer, you can withhold the employee’s share or pay it from your own funds. The obligation for the taxes is included on your individual tax return as an additional income tax liability and payment of those taxes is due with the filing of your annual individual tax return (on Schedule H - Household Employment Taxes).
4.) Federal and State Unemployment Insurance: If you pay total cash wages of $1,000 or more in any quarter in the current year or previous calendar year for all household employees, you need to pay Federal Unemployment Tax (FUTA). The tax is 6% of each employee’s wages up to $7,000 of earnings per year. The tax rate is reduced by paying state unemployment taxes on time. The FUTA tax is paid by you, the employer, and is also included on your individual tax return as an income tax liability (on Schedule H-Household Employment Taxes).
Each state has its own unemployment insurance tax and requires that you register with the state in which the household employee is providing services. The amount of wages subject to tax as well as the tax rate vary from state to state.
5.) Federal and State Withholding Taxes: As an employer, you are not required to withhold federal or state income taxes, but the employee may request that you withhold federal and state income taxes. In which case you will need to submit those withholdings to the tax authorities on a quarterly basis.
6.) Workers’ Compensation Insurance: Workers’ compensation policies are required by many states and are optional in others. In Massachusetts, if the employee works at least 16 hours per week, the employer must carry workers’ compensation insurance. In Florida, unless there are four or more full- or part-time employees, the employer is not required to carry workers’ compensation insurance regardless of how many hours worked. If worker’s compensation insurance is optional in your state of residence, it is recommended that you purchase a policy to guard against potential liability. Workers who accept the benefits of worker’s compensation generally forfeit the right to sue you as the employer. You may obtain a policy through your insurance agent or broker.
7.) Overtime Pay: Household employees are non-exempt workers and must be paid time-and-a-half for all hours over 40 in a 7-day work week. However, there is a federal exemption from overtime pay for live-in employees and those providing companionship care. Some states require overpayment pay for all workers.
8.) Employment Contract: Although not required, an employment contract is an excellent idea. The agreement should specify work hours, compensation, job responsibilities, benefits, house rules, payroll frequency, confidentiality, and termination of employment.
Whether you go through an agency or hire directly, your most important decision will be to hire the right person for the position.After all, the goal is to make your life easier by getting the support you need. RINET is experienced in all aspects of hiring household help and we are here to assist you. Please contact your advisor with any questions.