Do you have a regular person who comes to your home to provide housekeeping, maid or cleaning services? Do you know that this individual is probably your employee under common law and the Internal Revenue Code?
Any individual whom you employ to provide services in your home whom you pay directly AND whose total payments in the calendar year meets the IRS household employment threshold ($1700 in 2011 and $1800 in 2012) must receive a W-2 from the employer (family) and the employer must pay the payroll taxes.
Household employment taxes - known as the "nanny taxes" - include:
- Social Security & Medicare Taxes (13.3% of Gross Wages - employer may collect 5.65% from the employee via deductions.)
- State Unemployment Taxes where required.
- Federal Unemployment Tax (FUTA) where required.
The employer is legally obligated to pay (remit) both employee and employer portions of Social Security and Medicare taxes. Should the employer fail to collect this tax from the employee via periodic payroll deductions, the employer remains responsible to remit or pay the tax to the IRS. The household employee CANNOT remit their share of Social Security and Medicare tax independent of the employer.
Many families try to classify their weekly (bi-weekly, monthly) cleaning ladies as independent contractors. In the vast majority of circumstances, this is a total legal fiction. This usually only works if the worker is properly incorporated, bonded and licensed in the trade and maintains "corporate formalities."
If you wish to avoid this obligation, we recommend that you engage a cleaning service. The service will decide who to send to your home to do the cleaning, and you will avoid any payroll tax obligations. Examples of such firms are Merry Maids, the Maid Brigade, XYZ Cleaning Services, Molly Maids - you can locate by Googling "home cleaning service YourTown YourState." When you hire a service, you make your payments to Cleaning Services Inc. or Cleaning Services LLC - and not to Mary Jones.
~~~~~~~~~~~~~~~~~~~~
The US Department of State has issued non-immigrant visas to the personal attendants, servants, and maids of certain diplomatic and non-governmental staff members under G-5, A-3 and NATO-7 visa categories for many years. Guidelines for the sponsoring staff members were very broad, and subject to interpretation by the various sponsoring organizations.
In September 2009 the US Department of State issued new guidelines and recommendations to sponsoring organizations intended to standardize the basic terms and conditions of the G-5 domestic's employment. They also, for the first time, placed responsibility for the enforcement of these guidelines squarely on the sponsoring organizations.
HomeWork Solutions provides payroll and payroll tax services to hundreds of G-4 staff members working for non-governmental organizations such as the United Nations and the World Bank when they sponsor a G-5 domestic. We are recognized subject matter experts. We recently published a free e-book, G-5 Domestic Payroll Quick Start Guide, to help the G-4 sponsor better understand their obligations.
~~~~~~~~~~~~~~~~~~~~
IRS data places "nanny tax" compliance (declaration by families of their household payroll) at about 20%. Household employment experts believe even this number is optimistic. Looking at these statistics, a new household employer has to think that just ignoring this complicated and expensive issue is relatively risk free. What these numbers don't illustrate is the steadily increasing political pressure on the IRS to collect revenue, and the relatively low hanging fruit the "nanny taxes" present. Add to this the very real possibility that the elder care giver or nanny may file for unemployment benefits when the job ends, and the risk evaluation changes dramatically.
The "nanny taxes" are not just for nannies! If you hire someone to provide personal services in your private home - a housekeeper, house manager, maid, or elder care giver - you too are likely to fall under rules surrounding the "nanny taxes."
In today's economy housekeepers and nannies are finding that good jobs take longer to secure. The household who let's their off-the-books household staff go, for whatever reason, should be seriously concerned about their former employee filing an unemployment claim. The maid who was perfectly content to receive tax fee income experiences a reality check when they have no income for weeks, or months. Suddenly, filing an unemployment claim seems the only option to avoid eviction or to put food on the table. Once that claim has been filed, the whistle is blown on the former household employer. Since state unemployment systems share this information with the IRS, everyone is on notice that the family employed the nanny and that there are no tax returns on file.
This is when the laws of unintended consequences come into play.
The financial risk to the household in these cases is significant. The household employer has the obligation for remittance of the payroll taxes, not the nanny. A housekeeper who was being paid $500 cash has little or no income tax obligation on her wage - her risks for coming forward are nominal, and insignificant in the face of her lost earnings and need for unemployment benefits. The family, however, has approximately a $3700 back tax bill for just one year - and that is before penalties, interest, and the cost for professional assistance amending previously filed income tax returns. Consider for a minute that in metro areas a nanny's cash wage is often $600 - $800 a week or more and the liability grows substantially.
The family considering employing any household staff - nanny, housekeeper, maid, elder care giver - and skipping the household payroll taxes needs to seriously consider their risk tolerance.
If you employ a nanny, chances are strong at some point you will need to let the nanny go. There are myriad reasons a family fires a nanny. The children grow up and your beloved family nanny is no longer needed. Perhaps the nanny has horrible work habits - always late or a frequent 'no show.' Your family and the nanny simply may not 'click.' The nanny who was a wonderful nurturer of your infant does not have the energy to deal with your demanding toddler. Whatever the reason, firing a nanny can be an uncomfortable experience for both family and nanny.
Below are some tips and best practices when letting the nanny go.
- Be compassionate: It is best to break the news at the end of a work day and away from the children.
- Don't draw out the conversation: Short and simple are the best way to deliver the news.
- Notice: : If you have a written work agreement, you will most likely have a notice provision already agreed to. Adhere to it. If you require x weeks of notice from the nanny, be sure you return the courtesy, or provide pay in lieu of the notice.
- Letter of Recommendation: Letter of Reference When you are separating on amicable terms, please consider writing a letter of recommendation, and making yourself reasonably available for telephoned reference checks.
- Taxes: Your nanny may be eligible for unemployment compensation from your state fund. This is true even if you were not properly reporting her wages to the state!
What if you were paying under the table? The state unemployment agency will look back at the last one - two years of the nanny's employment. If you did not report/pay your unemployment taxes, you will be subject to administrative action, including reporting to the IRS, and may be charged with the entirety of the nanny's unemployment benefits. Unemployment insurance (tax) for the full time nanny averages $300- 500 a year - when paid on time. A nanny's benefits may be $200 - 400 per week for up to 99 weeks. That could be $20,000- 40,000 directly charged to you for failure to pay the requisite employment taxes.
- Security & Family Property: Request that nanny at the time of separation return all house and car keys, as well as any remote devices.
Download the Complete 10 Tips: How to Fire a Nanny
~~~~~~~~~~~~~~~~~~
Are you ready to compute your 2012 payroll?
The 4nannytaxes.com household payroll calculator has been updated with new withholding tax rates for 2012. Clients who write their own paychecks, please confirm your withholding calculations before issuing any 2012 payroll as there are many income tax rate changes!
New York and California employers, please remember that your state's Wage Theft Protection Act obligates you to provide certain pay rate notices, in writing, to your household employees, including their hourly regular and overtime rates of pay.
Minimum Wage Updates
Nannies, housekeepers, elder caregivers, and most house managers are considered Hourly, Non-Exempt employees under the Fair Labor Standards Act. This means that most are covered under both minimum wage and overtime laws.
For 2012, eight states increased their minimum wage. They are Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont and Washington. Additionally the City of San Francisco (CA) minimum wage increased.
Special Offer
Download our free tip sheet: 10 Tips: Avoid Common Nanny Payroll and Legal Mistakes
~~~~~~~~~~
Many states enacted legislation and regulations in 2011 that impact household employers. If you employ a nanny, housekeeper, house manager, home health aide, or any household staff, please stay informed.
California Household Employers
The CA Wage Theft Prevention Act imposes new notification and recordkeeping requirements on household employers with staff in California. Please see our prior blog posting for details on the California Wage Theft Protection Act. Household employers who issue their own payroll may download a CA Employee Pay Rate Notice from the 4nannytaxes.com website.
Additionally, California is cracking down on employers who misclassify employees as independent contractors. Under Federal and California law, almost all individuals who provide services (childcare, housekeeping, household management, elder care) in a private home and who are paid by the household are employees, not independent contractors.
Illinois Household Employers
Illinois household employers who withhold state income taxes from their household employees will now report and pay these taxes as part of the employer's Illinois state income tax return. Any IL state income taxes that you deducted (withheld) from your household employees in 2011 will be reported and paid with your personal state income tax return.
New York Household Employers
The New York Wage Theft Protection Act imposes new notification and recordkeeping requirements on household employers with staff in New York. Please see our prior blog posting for details on the New York Wage Theft Protection Act. Household employers who issue their own payroll may download an NY Employee Pay Rate Notice from the 4nannytaxes.com website.
Please note these requirements are in addition to 2010's New York Domestic Workers' Bill of Rights.
Pennsylvania Household Employers
Pennsylvania's Act 32 imposes mandatory local income tax withholding on most Pennsylvania employers. Please note, Act 32 does not apply to employers of nannies, housekeepers, and other household employees. PA Act 32 defines "employees" as those subject to mandatory Federal Income Tax withholding. Household employees are not subject to mandatory Federal Income Tax withholding. More information is available online from the state, particularly WITHHOLDING § 151.11. Registration of employers.
More to come...
If you employ a household worker, or provide staffing referral services for household and estate employment, please consider subscribing to this blog. There are numerous pending regulatory and legislative actions that will impact many household employers. Stay informed!
~~~~~~~~~~~~~~~~
Household staff, and nannies in particular, find that a former employer's letter of recommendation is an important part of his/her professional portfolio. The nanny or house manager often uses this portfolio, which is a collection of materials including her resume, work history, educational certifications, and examples of her work, to help 'sell' herself to prospective employers in the job interview. These letters are an important initial reference for families when they begin screening potential nannies and house managers.
When you write the nanny's letter of recommendation, it is important to remember that this letter is not a thank you note to the employee for good service. You are writing this letter parent to parent, or employer to employer.It is directed to the potential hiring family - a family with young children like yours who is trying to decide whether the nanny or house manager will be a competent, caring, and dependable addition to the household.
A letter of recommendation is typically organized as follows:
- A general salutation (Dear Sir or Madame) is typically used. You don’t know who will be reading this letter, and you want the former employee to be able to use it multiple times if necessary.
- State the basic facts – the dates of employment, the general hours worked, the ages and number of your children, her scope of responsibilities, particular skills or talents, whether she lived in or out. This serves to confirm the nanny's or house manager's resume data. Compensation history is not part of a letter of recommendation.
- Next, choose three or four of your former employee's positive traits that meant the most to you and your household. Describe positive traits in typical sales "Feature" and "Benefit" terms. For example, your nanny rarely called out sick and was always on time (the feature) so your household always ran smoothly and you could consistently meet your professional commitments (the benefit). Your nanny might have a take charge attitude (the feature) that allowed you to go about your business day without numerous interruptions and questions from the nanny (the benefit). Your nanny might have a very sunny disposition and endless patience (the feature) that allowed her to deal with repetitive or difficult situations without ever being cross or discouraged (the benefit). It is helpful if you could provide a specific example of some, if not all, of the positive traits. For example:
"Jennifer is unfailingly cheerful, with a sunny, positive outlook on life. Our child is developmentally challenged. Jennifer enveloped him in love, displayed endless patience, and consistently gave encouragement, acceptance and love. Our child continues to achieve beyond our expectations, and, like Jennifer, never becomes discouraged. We have been blessed. If you are looking for an honest, dependable caregiver who will love your child unconditionally, we encourage you to consider Jennifer."
- It is helpful to describe why the employment ended and your regret in losing your valued employee.
- Provide the hiring family with a way to contact you should they have further questions. You should leave either a telephone number or a permanent email address. Your physical street address is not required, nor is it recommended due to safety considerations.
- Always make sure the letter is signed and dated.
Changing jobs is stressful for household staff, particularly when she is leaving a situation that she loves and where she knows she is appreciated. This letter really is a thank you to your nanny or house manager – one of the nicest ways you can put the final punctuation mark to your employment relationship.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
The US DOL has proposed a series of rules changes that will result in a substantial number of elder care and home care workers being covered by the Fair Labor Standards Acts' (FLSA) minimum wage and overtime protections. This continues a trend of increased regulation and enforcement in the area of domestic service employees, with an increasing number of household workers being subject to Wage and Hour protections and enforcement. The proposal more strictly limits and defines the services of a "companion," and states that household employers MUST maintain accurate and contemporaneous time tracking records and pay household staff for every hour on duty. It also states that employees of third party employers such as staffing agencies are not exempt from minimum wage and overtime protections. Public comments will be solicited when the proposal is published in the Federal Register.
CURRENT DEFINITIONS: "Companionship services" as defined by the US Department of Labor in 1974 refers to "services for the care, fellowship, and protection of persons who because of advanced age or physical or mental infirmity cannot care for themselves. Such services include household work for aged or infirm persons including meal preparation, bed making, clothes washing and other similar personal services. General household work is also included, as long as it does not exceed 20 percent of the total weekly hours worked by the companion."
When the job functions performed adhere to this definition, the companionship exemption applies to the worker and his/her protections under the FLSA whether employed directly by the family or individual, or employed by an independent for profit or not for profit home health agency.
PROPOSED DEFINITIONS: The US DOL website states "The proposed definition of companionship services is limited to those duties that are directly related to the provision of fellowship and protection for a person who, because of advanced age or infirmity, is unable to care for himself or herself. It also allows for the performance of personal care services when those services are performed incidental to the core companionship functions and so long as they do not exceed 20 percent of the employee’s time during a work week."
Personal care services are now to be limited to no more than 20% of the employee's work time, and provision of incidental household services (vacuuming and dusting for example) is specifically prohibited under the proposed defintions. According to the DOL "The performance of duties that are not for fellowship and protection of the aged or infirm person, or incidental to the provision of fellowship and protection, are not “companionship duties,” and therefore, any performance of general household work would result in the loss of the exemption for the week."
In addition to the more limited definition of job functions classified as "companionship services", the proposed regulations specifically limit the exemption to individuals employed directly by the individual or family. Third party employers must adhere to the FLSA for all of their direct pay staff providing home care and companionship services.
OVERNIGHT CARE: According to the proposal, "an employee who is required to be on duty for less than 24 hours is working even though the employee is permitted to sleep. All the time is counted as hours worked. However, if the employee is required to be on duty for 24 hours or more, the employer and employee may agree to exclude bona fide regularly scheduled sleeping periods of not more than 8 hours from hours worked. If the sleep period is interrupted to the point where the employee does not have the opportunity for at least five hours of sleep, the entire period must be counted as work time. Where there is no express or implied agreement with respect to sleep time, all hours must be counted as work time." (Emphasis added)
Lastly, live in domestics of ANY job description continue to be exempt from overtime when directly employed by the family. The proposed rules "requires employers to maintain an accurate record of the actual hours worked by such workers. It will no longer be sufficient to have a work agreement between the parties." However, live in domestics employed by any third party employer are covered by the overtime provisions of the FLSA.
RESOURCES:
Notice of Proposed Rules Making (12/16/2011)
Blog July 5, 2011 Legislative Repeal of Companionship Exemption Considered
Blog October 24, 2011 Companionship Exemption Faces Scrutiny
While most media attention in 2011 was focused on AB889 the California Domestic Workers' Bill of Rights, which did not pass in the 2011 legislative session, two other pieces of legislation that household employers must be aware of passed with little notice.
California Wage Theft Protection Act: Mandatory Notice of Pay to CA Employees
Household employers must provide written pay notification to employees at the time of hire, and any time a pay rate change occurs, that includes:
- Hourly and overtime pay rates per hour, as well as any special pay rates.
- The regular pay day.
- The employer's name, physical address, and telephone number.
- The name, address, and policy number of the employer's Workers' Compensation Insurance Carrier.
Additionally, employers are required to provide any notice of change to any of this information within seven days of the change. A sample CA pay rate notice may be downloaded from the 4nannytaxes.com website.
California household employers are now required to provide a pay stub with every payroll which documents the total hours worked, the total gross wages, all deductions, the net pay, as well as employer and employee names, employer address and the last 4 digits of the employee's SSN or tax id number.
Bottom line, California household employers should review their record-keeping systems and ensure that they maintain the required records, including the CA pay rate notice, and any new notices, for at least three years.
Fine for Willful Misclassification of Employees as Independent Contractors
Effective January 1, 2012, a household employer who treats their household employee as an independent contractor (issues a Form 1099 instead of a Form W-2) can be fined between $5,000 and $25,000 per occurrence. The law's definition of "willful misclassification" is any employer avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor. In addition to the fine, employers who are found to have incorrectly classified employees as independent contractors are responsible for paying all taxes not previously withheld, all employer taxes, and any penalties and interest on the unpaid taxes.
We have a discussion on classification of nannies and other household employees at the 4nannytaxes.com website for your review. If you would like to seek legal counsel, we refer CA clients to Bob King, Esq., the founder of Legally Nanny.
RESOURCES:
California Wage Order 15
California Wage Theft Protection Act
~~~~~~~~~~~~~~~~~~~
Monday December 19, 2011 Update: What appeared a certainty two days ago is suddenly in jeopardy today. The House of Representatives is poised to reject the Senate's 2 month extension of the payroll tax holiday - insisting on a bill that funds the extension for a full year. We are watching this...
The temporary 2% reduction in employee Social Security Tax deductions, scheduled to expire December 31, has been extended two months may be extended two months, through February 2012, in a rare Saturday session of the US Senate. The bill is schedule to be voted on in the House of Representatives Monday December 19.
All household employers who pay their household employee directly (nanny, housekeeper, maid or elder caregivers) should recalculate their employee's payroll tax withholding prior to writing the first paycheck in 2012. Federal income tax withholding will change, as well as many state tax rates. The 4nannytaxes.com Household Paycheck Calculator is being continuously updated as rates are published. This is also a good time to ask your employee(s) to review their payroll withholding (Form W-4) and adjust exemptions where necessary.
Changes to tax rates, employer reporting, and employment rules and regulations have come at a rapid pace in the last several years. Employers who prefer to outsource the responsibility for compliance with new rules and regulations may consider HomeWork Solutions' full payroll service (NaniPay). Go ahead, simplify!
~~~~~~~~~~~~~~~~~~~~~~~~~~~~