To qualify as an independent contractor, the worker must show factors that indicate true independence, such as being able to determine when (days or time) and where work is performed, to work for others and provide their own equipment. An example of a household independent contractor is a gardener who comes to the home as needed or on a flexible schedule, bringing his own lawn equipment. Additionally, an independent contractor is free to bring their own helpers, or to have some or all of the work done by others, without consultation with the household.
Nannies, housekeepers and elder care givers privately paid directly by the family are almost always employees of the families they work for. Common law (not the tax code -or- your written work agreement) makes the determination of when an employer/employee relationship exists. Under common law, a worker who performs services for you is your employee if you can control the work schedule, what will be done and how it will be done. It does not matter whether you give your nanny or caregiver great latitude, but rather that you have the right to control the work. It does not matter if the work is performed on a full time or part time basis. It does not matter whether the worker lives with you or not. It does not matter if he/she is paid hourly, daily or a salary. It does not matter how the employee refers to herself or how you refer to him/her in an employment contract. The IRS articulates strict guidelines that differentiate employees and independent contractors to further eliminate confusion (Refer to IRS Publication 926). Nannies, elder care givers, maids, housekeepers and other domestics are generally considered employees. You are generally obligated for all payroll tax filings and remittances if you pay the worker $1800 or more in the calendar year (2012).
The IRS reaffirmed this stance twice in 1999. In two private letter rulings (PLR 199923014 and 199923015) the IRS disregarded a written contract's designation of a worker as a contractor, ruling that the substance of the relationship and not its label determines the worker's status. More recently, the Kentucky Supreme Court ruled that an employment contract was "nothing short of legal fiction" when it "attempts to create independent contractors out of workers who clearly are not engaged in independent businesses." (Unemployment Insurance Commission v. Landmark Community newspapers, 2000-SC-0884-DG 12/19/02)
If you engage a nanny or other care giver whom you do not pay directly - you pay an agency for example - and the referring agency establishes the scope of work, the care giver's pay rate, the agency pays the care giver, and even determines which care giver to send to you, you will generally not be considered the employer of the agency personnel and you will not have payroll tax obligations. As a practical matter, this scenario happens most often with home healthcare workers, and very rarely with nannies, doulas and temporary babysitters.
Certain professionals such as physical therapists, occupational therapists and speech therapists who come to your home to provide specialized professional services for you or your dependent will generally be treated as independent contractors and carry their own insurance and pay their own taxes.
You are also NOT required to pay employment taxes on the monies paid to the following individuals for childcare or domestic services:
You are also not required to pay Social Security and Medicare taxes for a household worker if the total cash wages paid does not reach the annual wage threshold, currently $1800 per year. (2012-2013) Just to keep it interesting, a 1099 form is due to the employee when earnings are between $600 and $1799!
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