Financial Friday: Independent Contractor Law

Independent Contractor Law
Compliments of Breedlove & Associates, written specially for Regarding Nannies

This time of year, we frequently receive questions from both families and nannies about payroll and tax reporting requirements for a summer position.  Many families assume that because the position is temporary, they can classify the nanny as an independent contractor and issue her a Form 1099.  This assumption is incorrect and can land the family in a lot of trouble.  Here’s why:

• The IRS has ruled that a household worker is an employee of the family for whom he/she works;
• It is not based on hours or wages or what’s more convenient for the family;
• It is based on an IRS 20-point test which deems workers to be employees unless they operate like a business.

Federal and state tax agencies are initiating huge efforts to crack down on employers who misclassify their workers as independent contractors.  If caught, a family may face severe penalties and interest on the back taxes owed, as well as felony tax evasion.

In addition to exposing themselves to financial and legal risk, families who misclassify their nannies as independent contractors are also depriving their nannies of essential benefits.  Here are a few:

• Employer contributions to Social Security and Medicare;
• Eligibility for unemployment insurance and workers’ compensation benefits;
• Payroll documentation for establishing employment history.

Nannies deserve (and should want!) to be paid professionally because it’s an investment in their financial future.  For more information on independent contractor law, or the payroll and tax obligations of household employers, please don’t hesitate to call us at 888-273-3356.  We’re here to help.