Welcome to COVID-19 summer. With schools remaining closed for unknown periods of time, and summer camps being canceled, many families are searching for options to help bridge their child care gap during COVID-19. As with hiring any household employee, and especially on a short-term basis, families tend to get overwhelmed with the unknown. Here we team up with HomePay to help you figure out how to properly classify a temporary nanny and pay them legally.
Is a temporary caregiver an employee or an independent contractor?
When a family hires a caregiver – either on a short or long-term basis – an employment relationship exists. The determination is based on the nature of the work being performed, and the IRS has ruled definitively that caregivers working in a family’s home are employees of the family – not independent contractors. However, if you pay your household employee less than $2,200 in a calendar year, you qualify for an exemption from the tax withholding and reporting requirements. Keep in mind that federal and state labor laws still apply in all employment situations.
What are the tax and labor law requirements for household employers?
The requirements vary by state. Our partners at HomePay have a detailed tax and labor law compliance checklist that you can access on their website.
What happens if I don’t comply?
Now more than ever, it is critical that families comply with their employer obligations when hiring a caregiver or other household worker. Failure to do so will result in issues if the employee needs to access important financial safety nets, such as unemployment insurance, in the future. Additionally, if the wages are paid under-the-table, the family will not be able to take advantage of tax breaks.
How much does it cost to comply with household employment tax and payroll laws?
Household employment compliance obligations can feel overwhelming for busy families. The good news is paying legally is not as difficult or expensive as it seems. HomePay handles all the compliance details and there are tax breaks that typically offset most of the employer costs – especially in short-term employment situations. Here is a sample budget scenario we put together for a family considering the option of hiring a nanny to provide care from May through September:
Nanny Gross Pay $9,600.00
Employer Taxes $1,021.40
Cost Before Tax Breaks $10, 621.40
Tax Breaks $-2,200.00
Employer Cost After Tax Breaks $8,421.40
For an estimate of your tax costs – and your tax breaks – you can use HomePay’s free Employer Budget Calculator or contact them to run a specific budget scenario for your family.