Tax Rules of Hiring a Caregiver

Michael Wiener, E.A.

by Michael Wiener, E.A.

People hire others to work in their homes all the time. They hire babysitters, housekeepers, private nurses, nannies, or yard workers to help take care of their families and their homes. Many people do not realize that even though these people are working in their private home, the government has instituted tax rules that apply to these situations. The tax rules surrounding the employment of a caregiver can be confusing, not to mention costly, if a mistake is made.

The first thing a person needs to determine is if the caregiver is a household employee. If someone is hired to care for a family member and is told not only what work needs to be done, but how the work is done, then that person is considered a household employee. It does not matter whether the work is full-time or part-time, or if the worker was hired through an agency or association. It also does not matter whether the worker is paid by the hour, daily, weekly, or on a by the job basis.

One of the biggest mistakes people make when hiring a caregiver is assuming they don’t have to pay taxes if they pay the caregiver in cash. This way of thinking is not true. If a caregiver earns more than $750 per quarter or more than $1,900 a year, the IRS considers that person a household employee and taxes must be paid accordingly.

Failure to pay the right taxes can result in fines and penalties. Another common mistake people make when hiring a caregiver is hiring a person who is not a legal resident of the United States. Remember, it is unlawful to knowingly hire or to continue to employ a person who cannot legally work in the United States.

Once a caregiver is hired on a regular basis, the employer and the employee must complete the United States Citizenship and Immigration Service Form I-9, no later than the employee’s first day of work. After hiring the caregiver, the employer must also perform additional tasks:

• Find out if he or she needs to pay state taxes
• Withhold Social Security and Medicare taxes
• If the employee requests that he or she does so, then the employer must withhold federal income tax
• Keep good records
• Obtain an Employee Identification Number (EIN)
• Give a Form W-2 to the caregiver or household employee at the end of the year. Also, be sure to send copy A (Form W-2) to the Social Security Administration.
• File Schedule H (Form 1040) with the employer’s federal income tax return (if he or she does not have to file a tax return, then file the Schedule by itself)

It is in the employer’s best interest to pay the household employee through legal means. The immediate costs may be increased, but it may be possible for many of the costs to be offset through tax breaks.

If you should have a topic that you would like me to
discuss or if you should have a question, please feel
free to call 239.403.4410 or e-mail me at
mike@cctaxandaccounting.com.
An enrolled agent, licensed by the US Department
of the Treasury to represent taxpayers before the IRS
for audits, collections and appeals. To attain the enrolled
agent designation, candidates must demonstrate
expertise in taxation, fulfill continuing education
credits and adhere to a stringent code of ethics.