“Worker classification” refers to whether a worker is classified as an employee or an independent contractor for federal and state employment tax purposes. Employers need to recognize the difference between these two classifications, because the employer’s tax requirements are contingent on whether the professional is working for the employer or is actually working for him or herself. It is therefore paramount that an employer knows the difference between the two, so that both parties’ taxes are filed properly. An employer can be penalized with having to pay 100% of associated payroll taxes of any payments made for services if the worker status is determined incorrectly. Additional fines, penalties, and interest may apply, and the effect on the family-nanny relationship could be devastating if it is determined the worker owes years of unpaid taxes.
Is my nanny an independent contractor?
When it comes to household employment, the vast majority of household workers are employees, not independent contractors. Families who try to avoid their tax obligations by attempting to define their nanny as an independent contractor may want to reconsider. The IRS is aggressively pursuing these cases and has been known to add penalties to tax and interest owed, along with civil penalties.
Whether an employer-employee relationship exists depends on specific facts including whether the employer controls the means and manner of an employee’s work performance. The Equal Employment Opportunity Commission (EEOC) lists 16 factors for distinguishing between an employee and an independent contractor. The status of an employee could be established even if only some criteria are met. The EEOC stresses that these factors are non-exhaustive and other circumstances might influence a given assessment.
Answering “Yes” to some or all of the following items generally indicates that the worker must be classified as an employee as opposed to an independent contractor:
- The employer has the right to control when, where, and how the worker performs the job.
- The work does not require a high level of skill or expertise.
- The employer furnishes the tools, materials, and equipment. (For household employment, this would refer to items owned by the employer that a nanny or housekeeper uses for their job.)
- The work is performed on the employer’s premises.
- There is a continuing relationship between the worker and the employer.
- The employer has the right to assign additional projects to the worker.
- The employer sets the hours of work and the duration of the job.
- The worker is paid by the hour, week, or month rather than the agreed cost of performing a particular job.
- The worker does not hire and pay assistants.
- The work performed by the worker is part of the regular business of the employer. (In the case of household employment, the “regular business” refers to being a household employer.)
- The employer is in business. (Again, “business” refers to being a household employer.)
- The worker is not engaged in his/her own distinct occupation or business.
- The employer provides the worker with benefits such as insurance, leave, or workers’ compensation.
- The worker is considered an employee of the employer for tax purposes (withholding federal, state, and Social Security taxes). (This applies to household employment if the worker is paid more than $1,900 a year.)
- The employer can discharge the worker.
- The worker and the employer believe that they are creating an employer-employee relationship.
For further guidance in determining a worker’s status, the IRS offers Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding). You can file this with the IRS if you are unclear about the status of your worker, the IRS will then review and officially determine the worker’s status for you.
For more information, please contact us at (518) 348-0400.