Tax withholding and benefits administration are often among our clients’ greatest administrative concerns. The IRS defines a household employer as someone who pays an individual to perform duties in or around their home and controls when, where, how or by whom the work should be performed. Household employees include nannies, medical caregivers, housekeepers, chefs, personal assistants, household managers, etc.
Every year, we see a handful of minor changes to household employment payroll, tax or labor law. 2018 is no different – and most families will be impacted by one of more of the following changes:
- Tax withholding threshold increases to $2,100 per year (up from $2,000 in 2017). This means families paying this amount or more to an employee will be required to comply with the tax withholding and wage reporting process for household employers.
- Mandatory paid sick leave for caregivers begins in Vermont, Washington and St. Paul, MN. Dozens of other states and cities already required paid sick leave or time off for household employees (Unfortunately, Georgia is not one of the states). These benefits are accrued based on hours worked, so they must be tracked and managed within payroll processing.
- January 1 minimum wage increases will take place in Arizona, California, Colorado, Hawaii, Maine, Michigan, Minnesota, Montana, New Jersey, New York, Ohio, Rhode Island, South Dakota, Vermont and Washington. The U.S. Virgin Islands will increase their minimum wage on June 1, while Maryland, Oregon and Washington D.C. will follow with an increase at the start of a new fiscal year on July 1, according to the National Conference of State Legislatures.
Here is some essential information to build your base of knowledge on the topic. The most common points of misunderstanding surround employment status and the wage & overtime rules. For this, we encourage clients to consult a qualified tax professional or IRS Publication 926 Household Employers Tax Guide. Additionally, we can make recommendations regarding domestic tax and payroll services.
- Employee vs. Contractor – To simplify administration, some families and domestic staff choose to engage in a client /Independent contractor relationship, with the worker filing income as a 1099 independent contractor. The perceived benefit to the family is that the worker is theoretically treated as an outside self-employed proprietor, responsible for her own taxes and insurance. The family just “pays the bill”.
Unfortunately, the decision as to whether or not the worker may file as a contractor is not at the family or employee’s discretion. Independent contractor status is defined by the nature of the relationship, and rarely do domestic work arrangements qualify unless the worker can demonstrate sufficient independence and expertise. For example, does the worker have a license, business card, multiple clients, freedom to perform his or her duties and authority to make decisions without the family’s involvement or supervision? Does the worker use his or her own equipment to perform the work?
Rarely are these requirements met completely, and if the worker or family is ever audited or the worker ever files for unemployment or social security benefits in the future, the nature of employment may be reviewed and corrected, with penalties levied on both parties.
- Business vs. Household Payroll – Families who own a business are sometimes tempted to include their household employee within the company’s payroll and tax reporting process. This could potentially be expensive and has been held to be illegal. The IRS has ruled that household employees are not direct contributors to the success of the business and therefore, should be handled through the household payroll and reporting process.
- Wage & Overtime – Per the Fair Labor Standards Act, you are required to pay overtime of 1.5 times the regular hourly rate for a household employee who does not live with you, and works over 40 hours in a 7-day work week. If a household employee works more than 40 hours in a week and is paid a salary, overtime should be included in the salary computation. Live-in employees are subject to different overtime treatment and requirements vary by state. Some states also have special guidelines regarding how overtime should be calculated. Overtime is not required to be paid when work is performed on a holiday.
- Minimum Wage – Minimum wage in Georgia is currently $7.25 per hour.
- Mileage Reimbursement – The current federal mileage reimbursement rate is 53.5 cents per mile. This rate, which covers the cost of gasoline as well as general wear and tear on the car, should be used to calculate reimbursement payments to an employee who drives her own vehicle while “on the job.” Mileage reimbursement is not considered taxable compensation, so neither the employee nor the employer is required to pay any taxes on that portion of the compensation. Note: Miles driven while commuting to and from work are not considered “on the job.” If the employer reimburses the employee for commute mileage, it is considered taxable compensation.
- Health Insurance – Household employers in Georgia are NOT required to pay for their employee’s health insurance. However, there is a tax incentive to do so. Families with only 1 employee can make contributions toward their employee’s health insurance premiums and treat the amount as non-taxable compensation. Neither the employee nor the employer are required to pay any taxes on that portion of the compensation. Note:Employers with 2 or more employees must purchase a policy through SHOP (Small Business Health Options Program) to gain this benefit.
- Workers’ Compensation Insurance – Household employers in Georgia are not required to carry a workers’ compensation insurance policy. However, we recommend obtaining coverage because it assists with medical expenses and lost wages if an employee has a work-related injury or illness. It also provides protection to the employer since workers who accept benefits generally forfeit their right to sue the employer regardless of fault.
- Unemployment Insurance – Georgia unemployment insurance is a state-managed program that provides financial assistance to help laid-off workers make ends meet until they can find another job. This “insurance” is funded through taxes that employers are required to pay on wages paid to employees. These taxes flow into a general fund, and unemployment benefits are distributed from the fund to employees who are “let go” from their job due to no fault of their own. The Georgia Department of Labor determines whether or not an applicant qualifies for benefits after reviewing their online or paper application and/or by conducting a telephone interview. Benefits paid to a former employee by the Department of Labor may trigger a future tax rate increase for the employer.
While we at The Hazel Agency do not enforce the tax rules, we do our best to inform clients so they make the best decisions for their situations. We also offer to assist with work agreements and other new hire paperwork to get employers and employees off to a positive start based on a clear understanding of their compensation and job duties.
If we can be of further assistance, please contact us at 770-643-2034 or visit us on the web at www.thehazelagency.com.
Wishing you a Happy Holiday and joyful New Year. Best wishes from The Hazel Agency!