The Caregiver as Employer
When hiring a professional in-home caregiver, there are a couple of ways in which they can be selected, either from an agency which specializes in screening and placing professional caregivers, or by doing the research, interviewing, screening, and hiring all on your own.
Keep in mind that if you hire a professional caregiver on your own, you will be entirely responsible for paying certain types of taxes that may be new to you, as well as having to know which taxes your new employee should be paying as well. Although you’ve hired a professional caregiver, who is much more than just a “domestic housekeeper,” the IRS will recognize you as the employer of a domestic.
If you pay your professional caregiver currently $1700 in cash wages per calendar year (note: the IRS may change this amount annually.) you will be expected to file payroll taxes on such things as: Social Security & Medicare taxes ( Federal Unemployment Tax (FUTA); state unemployment and disability insurance taxes levied on the employer; and advance payment of the earned income credit for eligible employees.
In order to pay an employee’s payroll taxes, you, the employer, will be required to collect the employee’s Social Security and Medicare taxes. If you fail to do so, you may be solely responsible for sending in your employee’s taxes on their behalf. Do know that deducting federal income taxes and most state income taxes is optional. If income taxes are not withheld by the employer, then the employee is required to make periodic payments of any amounts due. Just as you must pay taxes as an employer, you should know the type of taxes your employee will need to pay for themselves and/or contribute towards: Social Security & Medicare Taxes ( collected and remitted by employer); Employee Disability/Unemployment Taxes where required; Federal/State Income Tax.
As an employer of a professional caregiver (domestic,) you must make annual payments for Social Security, Medicare and Withheld Income Tax (if applicable) Remember that wage reporting must occur on a quarterly basis and state unemployment taxes and withheld state income taxes must be paid on a quarterly basis. Federal Unemployment is due annually, and, as an employer, you are required by law to give your employee a wage and tax statement (Form W-2) no later than January 31.
What if you hire a professional caregiver who states that they are an “independent” contractor, and that they do not want you withholding anything for taxes? Simply put, the IRS does not allow for this, and they have very strict guidelines which define the difference between an employee and an independent contractor. Since professional caregivers and domestics are considered to be employees by the IRS, it doesn’t matter how a professional caregiver may refer to themselves, or how you may have referred to them in an employment contract. Technically, they are working for some one – you, therefore they are an employee and can not be considered, especially by the IRS, as an independent contractor. No matter what your caregiver wants to call themselves, the bottom line is that you are still obligated for all payroll tax filings and remittances.
When it comes to worker’s compensation, it’s best for you to check with a local, licensed insurance broker who will be able to tell you what your local regulations stipulate. Since each state’s regulations concerning worker’s compensation and disability insurance vary greatly and can be quite confusing, it’s best to have a professional tell you what you need to be paying into as an employer.
For employees, worker's compensation is a form of protection, mandated under state law for a worker and his or her dependents against injury and/or death occurring in the course of their present employment. Worker’s compensation insurance may be purchased through a licensed insurance broker and/or a state insurance fund. This is a policy of insurance and not a payroll tax. The purpose of a worker's compensation system is to provide financial and medical benefits to the victims of “work-related” injuries and their families regardless of fault. The cost of this insurance is paid by the employer. Insurance premiums are determined by the number of employees, their annual payroll, and the type of work they do. As an employer, do not confuse worker’s compensation as being some form of health insurance, nor is it intended to compensate for any disabilities acquired prior to accepting the position they presently hold.
Taking on the new role of “employer” can be quite intimidating, especially considering all of the other issues you are undoubtedly having to deal with regarding the health and well being of a loved one. It’s best to learn all you can before deciding upon hiring a professional caregiver to come into the home. It’s easy to think about the ways in which having someone there will help you, but you must also think of how things will change for you, financially as well as legally.
Remember, if you do become an employer, you must pay all taxes that are expected of you. Failing to do so will compromise the validity of your own personal income tax return, and since there is no statute of limitations on failing to report and pay federal payroll taxes, you will eventually be expected to pay back taxes, with penalties and interest charges that will likely exceed the original amount owed.
Get educated, stay informed, and make decisions that are not only best for your loved one, but will be best for you, too.