Do you (or will you soon) employ a nanny, babysitter, housekeeper, driver, or other household employee? Becoming a home employer means taking on quite a few added tax responsibilities, so here are some tips to help you steer clear of common mistakes.
1. Know the difference between an employee and independent contractor.
Does the family control who, what, when or how the work is performed? In that case, the worker is an employee, NOT an independent contractor. The IRS is starting to crack down on industries like household employment with stronger enforcement initiatives to guarantee compliance in this area, so classify your worker appropriately.
2. Understand overtime laws under the Fair Labor Standards Act (FLSA)
Under the Fair Labor Standards Act, household employees are non-exempt, meaning they are entitled to overtime pay at least 1.5 times the regular wage for all hours over 40 worked in a 7-day work week (some states require overtime after a specific number of hours worked daily so check the guidelines in your state, but live-in nannies MAY be an exception to this rule.) Paying a salary doesn’t avoid the overtime requirement.
If the worker and employer agree to a salary amount based on a schedule that regularly includes more than 40 hours, the family should protect itself by addressing overtime in an employment agreement that is signed by the employee. For example: Family and nanny agree to $550 per week based on a 45-hour work week. The employment agreement should specify that the weekly compensation was calculated based 40 hours at the regular rate of $11.58/hour plus 5 hours at the overtime rate of $17.37/hour. Additionally, it must be stated that any hours over 45 in a workweek will be paid at the overtime rate of $17.37/hr.
3. Find out the rules from a tax professional at the time of hire, not tax day
Hiring a household employee then waiting until tax time to sort out the paperwork can lead to big problems. Consult a tax professional at the time of hiring to make sure you understand all the documentation to be filed, and how taxes will be paid.
Avoid making these common household employment mistakes and the potential fines that could be incurred for not following the law. If you have questions regarding this or other employment rules, contact me today at 310-534-5577. My staff and I are here to help!