Straight Talk About the New Rules for Home Employees, or "NannyGate"

In 1995, people who hire household help will report and pay taxes for these workers right on their personal income tax returns. This is just one of the changes in the recently passed legislation commonly called the Nanny Tax (with our clients it's more of a Nurse's Tax.) Other changes include:

• Reducing the minimum payments to which withholding applies, eliminating some workers from withholding requirements
• Refunding taxes paid in for some home "employees"
• More issues about independent contractors

As media reports of noncompliance increased, Congress responded by passing the Social Security Domestic Employment Reform Act of 1994, making it easier for individuals who employ household help to report and pay taxes on those workers. When hiring a worker in the home, the following rules now apply:

Employers may not hire an illegal immigrant.

• Beginning Jan. 1, 1994, Household employers must withhold Social Security taxes, and pay a matching share of Social Security taxes as well as unemployment insurance payments, pay worker's compensation and withhold state income tax for workers whose wages exceed $1,000. (The previous threshold was $50 per quarter.)
• Household employers must report and pay withholding taxes and payroll taxes on their personal income tax return.
• Household employers must provide the employee a Form W-2 at the end of the year documenting wages earned. A copy must be filed with the Social Security Administration and the State and Local taxing authorities.
• Workers under the age of 18 are exempted unless household service is the individual's only employment. For example, if you hire a 16 year old as a baby-sitter on Saturday nights, you would not have to report and withhold taxes. However, if the 16 year old is hired to care for your elderly mother, or to do household cleaning you would have to withhold and report.
• Household workers, regardless of age or type of work performed, must report all payments on their personal income tax return. Also, it is significant to note that household workers rarely, if ever, qualify as independent contractors.

Many people are truly mistaken that it is an option to let the worker account for his own taxes, so that you do not have to do withholding. This could not be farther from the truth. The taxes are the least important issue!

If you misclassify an employee as an independent contractor, Worker's Compensation and the Ohio Bureau of Employment Services will be after you as well as the IRS. For example, suppose your household worker is injured while working taking care of your elderly mother. Is this worker going to just say "that's O.K.?" No way. The worker will be filing a Worker's Compensation claim against you or your mother, and what if they find you have been misclassifying this worker as an independent contractor? The IRS, the Department of Labor's Occupational and Safety Administration (OSHA), the Ohio Bureau of Employment Services (unemployment insurance) and Worker's Compensation will be knocking on your door.
Even if the worker wants you to treat then as an independent contractor, you can not do it! Workers will often want you to pay them in cash so that there is no reporting to the IRS. Don't do it! The worker will file a workers compensation claim if he or she is injured (not to mention a lawsuit and a claim against your personal liability insurance plan. Household employer should check with their homeowner's insurance agent to see if household employees are covered. Most do not cover this!)

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