Household Employment Issues: How to Keep Your Clients Compliant

By:
Guy Maddalone
Published Date:
Apr 1, 2015

As it relates to household employment, state, local and federal tax laws as well as relevant state and local labor laws are often overlooked or misunderstood. To avoid making a costly error, it is important to understand current tax and labor law and to follow it appropriately.

This article discusses how to effectively identify and address common compliance issues that may arise with respect to clients who employ domestic workers. Understanding the definition of household employment and the relevant provisions of the NYS Domestic Workers’ Bill of Rights will assist you in explaining the advantages of being compliant household employers to your clients.

Definition of “Household Employment”

The IRS defines a Household Employer as a person who pays an individual $1,900 (2014) or more in a calendar year to work in his or her home.  An Employee is defined as a person who takes instruction from the employer, works on a schedule set by the employer, and uses tools and equipment provided by the employer. In sharp contrast, an Independent Contractor are individuals who work under their own conditions, sets their own schedule, and uses their own tools and equipment.

To misclassify a domestic worker as an Independent Contractor rather than as an Employee may be considered to be tax evasion. As a consequence of a misclassification, the IRS may determine that as an Employer, your client is responsible for the Employee’s FICA taxes that your client failed to withheld, as well as his or her Employer’s taxes. Considering the increased enforcement of proper classification of domestic workers as Employees by the Department of Labor and the IRS over the past few years, being compliant is imperative.

If you are unsure of the proper classification of your client’s domestic worker, refer to IRS Form SS-8 for guidance. Additionally, it is essential to ascertain whether your client’s domestic worker is legally eligible to work in the U.S.  An IRS Form I-9 should be completed to verify employment eligibility.

Listed below are some facts about employer tax responsibilities.

Social Security & Medicare

Assuming your client’s domestic worker is an Employee (rather than Independent Contractor), the Employee’s share of social security and medicare taxes (FICA) that your client must withhold and pay over to the IRS on a wages of $1,900 or more in a calendar year is 7.65% of the Employee’s gross wages (6.2% for social security taxes and 1.45% for medicare taxes).  The Household Employer must also pay a matching amount of FICA to the IRS. With regard to FUTA (Federal Unemployment Insurance), the obligation to pay is triggered once an Employee is paid $1,000 per calendar quarter, up to a maximum of $7,000 annually. As to the thresholds for SUI (State Unemployment Insurance), they vary by state; some are as low as $50.

Federal and State Income Tax

The Household Employer is also responsible for the withholding of federal income tax and remitting it to the IRS. This tax is based on Income and withholding allowances claimed by a domestic worker on a W-4 Form. The imposition of state and local income tax is based on residency, income and withholding Allowances.  To determine the proper amount to withhold, a state withholding form should be completed by a domestic worker.

New York State Domestic Workers’ Bill of Rights

Understanding the New York State Domestic Workers’ Bill of Rights is essential in instructing your clients in the proper application of the certain labor laws to their Household Employees. In New York State, Household Employers are required to pay domestic workers at least a minimum wage ($8.75/hr) on a weekly basis. For all hours in excess of 40 hours per week or in excess of 44 hours a week for live-in Employees, overtime pay at the rate of 1 ½ times the regular hourly rate is required.

Workers’ Compensation and Disability Insurance

For domestic workers who work 40 hours or more a week, New York State requires a Household Employer to have Workers’ Compensation and Disability insurance. Workers’ Compensation and Disability Insurance is a policy that pays certain medical expenses and lost wages of an employee who becomes injured or ill on the job.

Labor Condition Requirements

Pursuant to the Domestic Workers’ Bill of Rights, a domestic worker is entitled to one day of rest in each calendar week and three paid days off after one year of employment. Notification of the rate of pay, overtime rates, payday, and the time off policy as well as a notice of termination and benefit cancellation is required. Also, domestic workers must be provided with payment statements.  Further, domestic workers are protected from unlawful discrimination and harassment. In addition to the three paid days allowed pursuant to state law, on the local level,  the New York City (NYC) Earned Sick Time Act allows  Household Employees working over 80 hours per calendar year  to two paid days off to care for themselves or a close family member in case of illness. Household Employees may avail themselves of those paid days of after one year of employment. Also, Household Employers are required to provide Employees with a written notice of their right to sick days.  Such notice should explain the accrual and use of sick days, the definition of a “calendar year,” and the employee’s right to file a complaint with NYC Department of Consumer Affairs.

Benefits of Being Compliant

Explaining the benefits of being compliant to your clients will help them correctly identify the type of workers they employ (an employee or independent contractor).  Likewise, this information will foster their vigilance, prompting them to notify you of any changes that occur. By being compliant, your clients will avoid expensive IRS penalties and lawsuits brought by unhappy employees. It also will reduce legal risk, audit risk, and the risk of being fined by the NYS Workers’ Compensation Board. In addition, your client may be eligible for tax breaks such as the Dependent Care Assistance Program (DCAP) and Child and Dependent Care Tax Credit (Form 2441). Being compliant also benefits the Employee by generating a legal employment record and verifiable income. This in turn will increase employee loyalty and work ethic.

Listed below are 10 Suggested Steps to Household Employer Tax Compliance:

  1. Obtain a Household Employer tax identification number (federal & state)
  2. File New Hire Report
  3. Calculate Employee tax withholdings and pay all required federal/state employer taxes
  4. Prepare and distribute pay stubs
  5. File quarterly state employment tax returns including payment as required
  6. File federal 1040-ES quarterly & remit federal estimated taxes
  7. Prepare and distribute Form W-2 annually
  8. Prepare and file all required year-end forms with the state & the Social Security Administration
  9. Prepare Schedule H to file with federal income tax return
  10. Monitor tax and labor laws for changes


MaddaloneGuy Maddalone
is the Founder & CEO of GTM Payroll Services. He is an entrepreneur and a 25-year veteran of the payroll, human resource, and employment services industry. He originally founded his Clifton Park-based company placing home healthcare workers, nannies, and other household staff. Shortly thereafter, he identified a need for domestic worker payroll services and became the original “NannyTax” payroll tax provider, known as GTM Payroll Services. Mr. Maddalone can be reached at guy@gtm.com.

 
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