HomeWork Solutions is a leading national nanny/household employee payroll and tax company. We work with thousands of families, and hear and respond to the same questions/concerns over and over again. We want to take the opportunity to share this information with you through this easy to follow Q. and A.
Q. Are nannies considered employees or independent contractors? Does it matter how much she earns or how often she works for the family?
A. Nannies are employees. It does not matter if the employer wants to call her an independent contractor, or that she wants to called that. The distinction between employees and contractors is written in law, and hinges on control. The family has the right to control when she works, how the job is performed, and provides the place and tools for the job. It does not matter if the family grants the employee great latitude – they still have the right of control, and that is the central defining element of an employer-employee relationship.
How much the nanny earns only impacts the tax responsibilities of the family, and does not change the relationship.
Q. Why does it matter if you call a nanny an employee or independent contractor?
A. Misclassification of your employee has numerous risks and potential consequences.
- Taxes: When you have an employee, you contribute to Social Security and Medicare programs, as well as unemployment insurance funds. Independent contractors pay higher Social Security and Medicare tax than employees, and are not covered by or contribute to unemployment insurance. If caught, the employer must make back tax payments, including employee FICA taxes that they didn't collect, and pay penalties and interest assessments.
- Insurance: Employers can obtain workers' compensation insurance, important to cover liability in the event of a workplace injury. Independent contractors are not covered by workers' compensation. If there is a workplace injury, and the family is found to have misclassified their employee as an independent contractor, they can be held financially liable for the employee's injury.
- Fair Labor Standards Act (FLSA): Overtime, minimum wage, and time tracking protections apply to employees, not independent contractors.
- Enforcement: Catching misclassification of employees as independent contractors is a workplace enforcement priority. Federal and state governments are anxious to collect unpaid employment taxes, penalty payments, and insure that all employees are paying their income taxes.
Q. If the nanny has a full-time job during the week and babysits for a bunch of different families on weekends, is the nanny an employee or independent contractor for the weekend families?
A. The nanny’s relationship with the weekend families will determine this. If she retains control – sets the pay rate, can say yes or no to the schedule, and can arrange for others to perform the work for her, then that is likely an independent contractor relationship. However, if Family A says they need her every Saturday from 6 PM until midnight, and only she can provide the services then this indicates an employer-employee relationship. Again, control is the central determining factor. The Internal Revenue Service's Form SS-8 is used to get an official determination of worker status.
Q. If the nanny makes her living doing babysitting and temp jobs is she an employee or independent contractor?
A. Whether a job is full time, part time, or temporary does not matter at all when making the determination of employee vs. contractor. Control is the central matter. Frankly, it is very hard for a nanny or the parents to make the case that the family does not have the right of control – what and when to feed the children, approved and disapproved activities, schedule, etc. In the vast majority of circumstances an employee-employer relationship exists. Certain specialties – especially newborn care and doula services – are easier to define as a contractor relationship. After all these care specialists are engaged to interact with the family in a very different way than a temp nanny interacts with a family. The NCS or doula typically will set the rate of compensation, may engage other individuals to help provide the desired services, and exercises considerable control over the scope and nature of the provided services.
Remember, how much the employee earns only impacts the tax responsibilities of the employer, and does not change the relationship.
Q. If the nanny works for an agency temping while she looks for a full-time job, is she an employee or independent contractor?
A. If the agency pays her, she is an employee of the agency. If the family pays her directly and pays the agency a daily or hourly fee for arranging the schedule/booking of the nanny to provide the services, she is an employee of the family.
Q. What the difference between a W-2 and a 1099?
A. W-2 Wage and Tax Statement is provided to employees. It will summarize the wages paid and taxes withheld from the wage. A nanny who receives a W-2 knows that the family is paying their portion of the Social Security and Medicare taxes, as well as unemployment taxes and workers compensation insurance.
1099 MISC is used typically by a business or family to document fees paid to an independent contractor. This independent contractor is responsible for self employment tax – essentially the employer and employee portions of Social Security and Medicare taxes. When a nanny employer provides the nanny a 1099 form, they are pushing their tax obligations over to the nanny. Not only is this not proper, but the IRS is cracking down on all businesses or families who issue 1099 forms, looking closely at the relationship between the parties (family and nanny in this circumstance) and prosecuting businesses and families who should have been issuing a W-2 form to the worker. This is an enforcement priority of the Obama Administration, and 22 states are working hand-in-hand with the IRS to do these examinations. States are interested because unemployment funds are severely depleted, and families who issue a 1099 are not paying their fair share of unemployment taxes.
HomeWork Solutions hopes you find this helpful … stay tuned for more upcoming discussions of common questions household employers and employees have. SUBSCRIBE TO OUR BLOG - DON'T MISS OUT!
Household employees - nannies, maids and housekeepers - and the families that employ them often don't understand how payroll tax, labor law, and the unemployment insurance system apply to this particular employment situation.
Unfortunately an article in today's New York Times was not completely correct and may have added to the confusion.
The facts are:
- Minimum Wage: Nannies, maids and housekeepers DO have minimum wage protections. Domestic service workers, with narrow 'companionship care' exemptions, have enjoyed the protections of the Fair Labor Standards Act (FLSA) since 1974. They are hourly employees, must be paid no less than the minimum wage, are entitled to overtime if they do not live with their employers, must be paid for all hours on duty and have the right to file a grievance if they are not paid properly by their employer.
- Unemployment Insurance: Domestic service workers are covered by unemployment insurance, and the families that employ them are legally obligated under state and federal law to comply with all tax reporting and payment regulations.
- Workers' Compensation: Twenty two states mandate that household employers obtain and carry a workers' compensation insurance policy to protect their nannies and other household workers. Among these are California, New York, Massachusetts and Maryland. Many other states allow families to obtain optional workers' compensation coverage.
HomeWork Solutions has an extensive Frequently Asked Questions that addresses these and other questions surrounding household employment. Have a question? Call us for a free telephone consultation at 800.626.4829.
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.
Download our free tip sheet: 10 Tips: Avoid Common Nanny Payroll and Legal Mistakes
The Obama Administration has identified worker mis-classification and the resultant payroll tax avoidance - specifically misclassifying employees as independent contractors - as an enforcement priority.
The IRS recently announced its Voluntary Classification Settlement Program—VCSP—allowing employers to voluntarily reclassify independent contractors as employees for the future (see Announcement 2011-64), as a new enforcement intitiative. This comes just days after the IRS and the DOL entered into a Memorandum of Understanding between the two federal agencies and 11 states for the purposes of using wage and hour claims, and possibly unemployment insurance claims, to investigate the payroll tax compliance of employers.
The IRS/DOL initiative includes the signing of memoranda of understanding between DOL and eleven states (Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, New York, Utah, and Washington). The DOL will share information with the IRS derived from investigations by its Wage and Hours Division into worker classification issues that may relate to payroll tax compliance. The IRS, in turn, will share that information with participating states. This enhanced cooperation between the federal agencies and the states means that it is even more likely that worker classification issues identified by either IRS or DOL, or a state, will eventually lead to full-scale enforcement action under both tax and labor laws. Household employment has long been identified as an industry where worker misclassification and payroll tax compliance issues are prevalent. The IRS estimates that fewer than 10% of household employers properly treat their nanny or housekeeper as an employee and pay the appropriate payroll taxes. The household employment tax gap - the shortfall between taxes due and actually collected, is estimated to be between $3B - $10B annually.
The IRS' Voluntary Classification Settlement Program offers employers who have consistently treated certain classes of employees as independent contractors, and who have issued 1099 forms in the past, the ability to voluntarily step forward, and if accepted in the program to settle all prior tax liability with a one time payment of just over 10% of the federal payroll taxes due in the prior year.
Nannies and housekeepers paid directly by the household employer are employees under common law. IRS Publication 926, the Household Employer's Tax Guide, clearly outlines the responsibilities of the household employer, including the issuance of a W-2 form to employees at year end and the remittance of Social Security and Medicare Taxes by the employer.
If you employ a nanny or housekeeper that you pay directly, we refer you to our Frequently Asked Questions About the Nanny Tax online at 4nannytaxes.com.
The US Department of Labor has introduced a new spartphone "app" to help hourly employees (nannies, housekeepers, maids and other household employees are ALL hourly under the Fair Labor Standards Act [FLSA]) track the hours they actually work.
This is all a part of an effort to aide employees in independently tracking their work hours, independent of employer records, and will assist them in prosecuting claims for unpaid wages and unpaid overtime.
The free app is currently available for iPhone and iPod Touch. According to the US Department of Labor's press release, workers without a smartphone may access the US DOL's Wage and Hour Division's printable work hours calendar in English and Spanish to track rate of pay, work start and stop times, and arrival and departure times. The calendar also includes easy-to-understand information about workers' rights and how to file a wage violation complaint. Both the time card app and the printed forms are available here
This is a huge advance for nannies, and an area of considerable risk for household employers. According to the US Department of Labor, these are the areas they routinely cite employers for failure to meet FLSA and other legal requirements:
- Failing to correctly classify non-exempt and exempt employees. This is the mistake investigators often target first. Household employees are non-exempt. This means they are required to be paid on an hourly basis, and that all household employees who do not live with their employers must be paid overtime. New York and Maryland extend overtime requirements to live in domestics - be sure you know your local rules and regulations.
- Failing to calculate overtime pay correctly.
- Misclassifying employees as independent contractors. According to the US Department of Labor's Wage and Hour Division [WHD], the "misclassification of employees as independent contractors is an alarming trend."
Often, the WHD adds, "workers are deprived of overtime and minimum wages, forced to pay taxes that their employers are legally obligated to pay and left with no recourse if they are injured or discriminated against in the workplace."
When the WHD finds cases of misclassification, it may refer the cases to state agencies and the IRS. Nannies ARE NOT independent contractors and employers who incorrectly treat them as such do so at considerable peril.
- Failing to pay for work during missed meal and rest periods. Wage-and-hour laws require employers to pay non-exempt employees for all time worked. Most nannies, and many household employees work without meal breaks or rest periods, and employers are required to pay for the time. If the nanny is not free to leave the premise on meal and rest periods, they must be paid. And when the extra time results in an employee putting in more than 40 hours in a workweek, the employer also owes overtime pay.
- Failing to pay for certain on-call time. If an employer engages an employee to wait to be put to work, the individual must be paid for the on-call time. Nannies who are required to be available during hours a child is in pre-school or in an organized activity such as sports practice session are considered on-call.
- Failing to keep required records. Federal law requires employers to keep accurate and contemporaneous time tracking records. So if there is a dispute with an employee about hours and pay and the employer is unable to show accurately recorded time records, courts will favor the employee's claims and records. This new smartphone app makes it easy for the nanny to track work hours.
- Substituting comp time for overtime pay. Under federal law, compensatory time off or comp time in place of receiving overtime pay is generally only legal for government employees. Federal law generally requires that employees get paid overtime for all hours worked over 40 in a seven-day workweek established by the employer. (Note: Some states such as California require overtime pay for hours worked over eight in a day.)
- Taking unauthorized deductions from paychecks. An employer can only legally deduct from an employee's earned pay the amounts required or authorized by law (such as Social Security, income tax deductions, and court-ordered garnisheed amounts) as well as deductions authorized by the employee (such as deductions for insurance premiums and loan payments).
Examples: A household employer cannot deduct amounts from a nanny or household employee's pay to cover damages to household property, including an auto provided for the nanny to transport the children or damage/breakage while cleaning, cooking, etc. And an employer cannot withhold a departing nanny's final paycheck as a way of collecting an amount the individual owes on a loan previously obtained from the employer -- unless the nanny has given authorization in advance.
- Failing to abide by state laws. States may have their own version of federal wage and hour rules. So employers need to be aware of and comply with the laws in the states where they have employees.
US Senator Sherrod Brown (D-OH) has introduced S.770 - Payroll Fraud Prevention Act. The bill would amend the Fair Labor Standards Act of 1938 (FLSA) to ensure that employees are not misclassified as non-employees, and impose substantial penalties on employers who are found to have classified bona fide employees as independent contractors for purposes of avoiding payroll taxes. The bill is referred to the Senate's Committee on Health, Education, Labor, and Pensions.
The FLSA explicity provides that domestics (nanny, housekeeper, maid, etc.) are household employees, are considered non-exempt (hourly workers) and are entitled to minimum wage and (for live out employees) overtime compensation. There is a limited exemption for live in companionship services provided to the elderly and infirm.
HomeWork Solutions Inc. has a more detailed description of the FLSA coverages in it's article Nanny: Employee or Independent Contractor?
Actor Robert DeNiro and wife Grace Hightower settled a longstanding legal dispute with their former nanny, who sued for unpaid overtime and holiday pay. Barry's original court filing in Manhattan in 2009 sought $40,000 in unpaid wages. The $30,000 settlement, agreed to by all parties, represents unpaid overtime alleged to total 750 hours and holiday pay for a 9 month period of employment from 2006 - 2007.
Nannies are non-exempt employees under the Fair Labor Standards Act. Nannies are paid on an hourly basis, and live out nannies are entitled to the overtime differential (one and one half times the normal hourly rate) for hours worked over 40 in a work week. Nannies are also protected under the FLSA's minimum wage provisions.
Families are advised to document their work agreement with their nanny in a written work agreement, and to state their nanny's wage in hourly rate terms. A written agreement, with contemporaneous time tracking, is critical to avoid s/he said - she said disputes of this nature.
HomeWork Solutions' exclusive Hourly Rate Calculator tool may be used by families to translate an agreed to weekly pay rate into FLSA complaint hourly rate language. Families should also be familiar with their local regulations. New York and Maryland, for example, extend overtime regulations to live-in nannies and other domestics. California calculates overtime on hours worked over 8 in a day.
The DeNiro/Hightower settlement is just another in a long string of overtime disputes between nannies and their former employers. Washington Redskins owner Daniel Snyder was forced by the courts to pay $44K in unpaid overtime in 2007, and in 2009 a Miami nanny/housekeeper was awarded $125K in back wages in a minimum wage and unpaid overtime dispute.
Many families (and agencies) use nanny work agreements that cover a specific period of time, generally one year. This is NOT a good idea. In a complicated United States District Court, D. Oregon, case involving:
- Wrongful Discharge
- Breach of Employment Contract
- Unpaid Wages
- Unpaid Overtime
the court affirmed that nannies are indeed non-exempt employees and are entitled to hourly pay and overtime pay for hours worked in excess of 40 in a work week. The court further affirmed that a work agreement that was expressly for a 24 month period of time (rather than "at will") was enforceable. The employer was required by the court to pay the discharged employee through the work agreement termination date.
If you employ or are considering employing any household employee, please take the time to read the court's decision. This is a text book case of what an employer should not do in nanny or household employment.
HomeWork Solutions' online FAQ provided detailed discussion of many of the FLSA issues addressed in this case, including the applicability of overtime in household employment. Our free sample nanny work agreement templates specifically addresses "at will" employment. We also have a free tip sheet, How to Craft the Nanny Work Agreement, available for download.
Do you have questions? Legally Nanny's Bob King is a noted industry expert. He assists families seeking professional assistance with a household worker's employment agreement, severance agreement, or any other legal matter pertaining to household employment. We refer clients with legal questions to Bob confident that he fully understands the household employment industry.