If you are hiring someone to provide personal care services for a frail, aging or disabled person, you are probably comparing the “pros” and “cons” of “on the books” and “off the books” arrangements. State wage and hour laws require a household employer to pay into State unemployment and workers compensation systems for a person who is an “employee.” Federal tax law requires the employer to pay into FICA and deduct & transmit the employee’s portion of contributions for FICA, Social Security and Medicare. Income taxes must be withheld and paid to the IRS and the state treasury. A W-2 must be provided to the employee after the end of each calendar year of employment.
According to IRS Tax Topics bulletin 756, “If you pay cash wages of $2,000 or more for 2016 (this threshold can change from year to year) to any one household employee, you generally must withhold 6.2% of social security and 1.45% of Medicare taxes (for a total of 7.65%) from all cash wages you pay to that employee. You also must pay your share of social security and Medicare taxes, which is also 7.65% of cash wages. (Cash wages include wages you pay by check, money order, etc.) Unless you prefer to pay your employee’s share of social security and Medicare taxes from your own funds, you should withhold 7.65% from each payment of cash wages you make.”
The big question is always whether the person is an employee or is an independent contractor. Take a look at the Internal Revenue Manual 184.108.40.206 (12-10-2013). The lines may be blurry for certain jobs, and the job title alone does not answer the question. The law establishes that the determination is made based on a number of factual elements. According to the IRS, “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” So who controls the work relationship is of critical importance. For instance, (1) who sets the schedule, (2) who controls how the job is performed, (3) and who provides the necessary supplies and equipment to perform the job?. Hargrove v. Sleepy ‘s (NJ Supreme Court, 2015) dealt with this classification question generally. The employer always bears the burden of proof.
By way of example, a housepainter who is hired for a one week housepainting job to be done when it fits into the painter’s schedule is more likely to be considered an independent contractor than a home health aide who is required to arrive and depart at set times each day, take a break at fixed times, and perform a specific set of duties in a certain way day in and day out.
What are the risks? Failure to pay into FICA or withhold and transmit income tax can subject the employer to liability for the back payments plus penalties and interest. Same goes for State unemployment, disability and workers compensation. If the worker is injured, they won’t be covered under workers compensation and may sue the employer. Homeowners insurance may or may not cover injury to a person who is working on the premises, especially if the employment was not disclosed on the insurance renewal application.
An at-will employment contract can be prepared between the household employer and the employee, which spell out the terms and conditions of the arrangement. State laws vary on whether in-home employees are exempt from minimum wage and overtime laws, and whether they are entitled o sick days.
There is no doubt that legal employment of household caregiver employees can be a hassle and will cost more. However, the risks are substantial if the relationship goes bad or the worker sustains a work-related injury.
Planning for a good old age includes analyzing potential caregiving arrangements and locations for receiving that care. For elder law planning advice, call us at … 732-382-6070