If you provide child care, cleaning services or health care in the home of your employer, it's important to understand the financial relationship you have with that person. Otherwise, you may not only open yourself up to extra taxes but also to risk that you're not even aware of. How so?
Employee or Independent Contractor?
Employers are responsible for paying payroll taxes and providing certain basic rights. But many employers try to skirt the rules and the cost by calling a worker an independent contractor rather than an employee. This happens frequently in the field of household employment.
The determination of whether you're an employee or an independent contractor is generally about how much control the employer has. If he or she can say how, when, where and with whom to do the work, you are an employee. If you decide these things, you're an independent contractor.
Keep in mind that employers prefer to call workers independent contractors because it's cheaper and the risk is placed on the worker. By paying a worker as an independent contractor (providing only Form 1099-MISC annually), employers do not pay any workers' compensation insurance, unemployment benefits, Social Security and Medicare taxes or withhold any income tax. So, while it may seem an attractive proposition to be paid in cash as a contract worker, it could be costly in the long run.
Household employers must begin to report and pay payroll taxes once they have paid the minimum amounts for each tax to any one individual. The required federal taxes are:
- FUTA (Federal Unemployment Tax Act), which is unemployment insurance. This must be paid once $1,000 (in 2014) has been paid annually to any employee.
- FICA (Federal Insurance Contribution Act) which covers the employee's contribution to Social Security and Medicare. This is paid once any employee has earned $1,900.
Both of these taxes are generally reported annually with the employer's federal income tax forms. These taxes provide protection for you as the employee, so it's important to know that they're being correctly paid.
Withholding and W-2s
Household employers are generally not required to withhold income taxes unless asked to do so. If you and the employer agree on withholding, provide him or her with Form W-4 indicating how much federal and/or state income tax to withhold. If your employer will not be withholding, it may be necessary for you to calculate and pay estimated taxes during the year to avoid a large tax bill or penalties for underpayment.
Like any other employer, though, they must provide all employees who earn more than $1,900 (in 2014) with Form W-2 at the end of each year. This statement of your income and taxes paid must be provided to you by January 31 of each year.
If you are unsure if your employer is following these rules for household employees or you need help filing your own tax forms for this income, contact a qualified tax preparer or accountant (such as Jeff Baker & Associates, PS). Getting professional assistance early can help you avoid any unpleasant surprises come tax time.