Financial Facts About Caregivers Who Work In Your Home

With permission from BANANAS Child Care Information & Referral
5232 Claremont Ave., Oakland, CA 94618
658-7353 • www.bananasinc.org

Did you realize that in the eyes of the government, you are probably an employer with reporting responsibilities?

Can’t My Caregiver Be An Independent Contractor?

The IRS is very strict about who is or is not qualified to be an independent contractor (self-employed). A gardener who takes care of a number of yards, brings his own tools and workers and makes his own schedule is not the employee of any of the families who use his services. However, an in-home caregiver whom you hire and can fire and who follows your specific directions and uses your supplies in caring for your child is an employee, which means you’re an employer and have to pay taxes. The only exception is when you use a caregiver supplied by an agency and you pay the agency, not the worker. In that case, the agency is the employer.

What Are My Federal Responsibilities As An Employer?

Social Security & Medicare: You are responsible for paying both your and your employee's share of Social Security and Medicare taxes if you paid the same child care provider $1,400 or more in 2003 or 2004. (If you are using this Handout after 2004, contact the IRS for the current reporting threshold and Social Security and Medicare rates.) The 2003 and 2004 rates are 6.2% for Social Security and 1.45% for Medicare for the employer’s share. The same percentages need to be withheld from the employee’s wages, for a total of 15.3%. So if you pay a caregiver $10,000 this year, you’ll owe $1,530 in federal employment taxes. Many caregivers prefer not to have Social Security taken out of their wages, but it protects them in the future. Since you as the employer could be backbilled for both your and the employee’s share of these taxes, it is advisable to pay them currently. Also, you can only take a child care tax credit on your federal income taxes if you pay Social Security.

Here’s how to pay the tax: Use a Form SS-4 to obtain an Employer Identification Number (EIN) from the IRS. The forms are available from your local IRS office, www.irs.gov or (800)TAXFORM (800-829-3676). Form SS-4 has information on how to apply for an EIN by mail or phone. Report and pay the Social Security and Medicare taxes by filing Schedule H with your annual federal income tax return (Form 1040). A penalty can apply if you don’t have enough federal income tax withheld to cover both your personal taxes and the federal unemployment taxes you owe on your inhome caregiver. You may want to increase your federal withholding or pay estimated tax payments in advance to avoid a penalty. Call (800)TAXFORM to request Form 1040-ES “Estimated Tax for Individuals” or download the form from www.irs.gov. You will receive the information and vouchers needed to make estimated payments. You should also request IRS Publication 926, “Household Employer’s Tax Guide” which gives you additional information on your responsibilities.

Federal Income Tax Withholding, Earned Income Credit & W-2 Requirements

Caregivers who work in your home are household employees and exempt from mandatory federal withholding of income taxes, but you can choose to withhold these taxes if the employee asks you to. The employee must fill out a W-4 form and you report and pay any federal income taxes you withhold with your annual Form 1040. An employee who is eligible for the Earned Income Tax Credit may elect to receive advance payments during the year with his/her pay. The employee must give you a completed, signed W-5 to request the advance payments. For more information, see IRS Publication 15, Circular E, Employer’s Tax Guide. As an employer, you also must issue your employee a W-2 form by Jan. 31 and file a copy with the Social Security Administration by February 28.

Federal Unemployment Insurance

If you paid your employee $1,000 or more in one calendar quarter in 2003 or 2004, you must pay a Federal Unemployment Tax (FUTA) on these wages with your annual Form 1040. The 2003 and 2004 rate is 6.2% of the first $7,000 in wages. You can take a 5.4% credit against this tax if you paid your full State Unemployment Insurance (SUI) payments before the filing due date for Form 1040.

Exceptions to Federal Requirements

Wages paid to employees under the age of 18 whose principal occupation is something other than a household employee (such as a student) are exempt from Social Security and Medicare taxes. There are also some complicated exceptions to the rules if the in-home caregiver is a relative (spouse, child or grandparent). For specific information about relative caregivers, Social Security, Medicare or FUTA, contact the IRS, (800) 829-1040, www.irs.gov or the local IRS office: 1301 Clay Street, Suite 160, Oakland, CA 94612, (510) 637-2487.

Federal Immigration Status

You are also required to complete an Employee Eligibility Verification Form (I-9) to keep on file for the federal government. This form establishes that the employee is eligible to work in the United States. To receive this form, contact the INS at (800) 870-3676 or www.ins.usdoj.gov.

What Are My State Requirements?

You are not required to withhold state income taxes from the wages of a caregiver who works in your home. But if you pay him/her more than $750 in a calendar quarter, you are supposed to withhold a certain percentage of the employee’s salary for State Disability Insurance (SDI). The SDI withholding rate for 2003 is 0.9%. The SDI withholding rate for 2004 is 1.18%, which includes 0.08% for paid family leave insurance. If you pay your caregiver more than $1000 in any calendar quarter, you must also pay into Unemployment Insurance (SUI) at a rate of approximately 3.4% on the first $7,000 of wages. An additional 0.1% Employment Training Tax (ETT) is paid at the same time. Both the employee’s contribution to SDI and your contributions to SUI and ETT are paid to the state either quarterly or annually if wages are $20,000 or less. For more information on State Disability, Unemployment Insurance or the Training Tax, or to order an employer “registration packet,” contact the Employment Development Department (EDD), Employment Tax Office, (510) 577-2396; 7700 Edgewater Drive, Suite 100, Oakland, CA 94621 or visit the department’s website, www.edd.ca.gov. For more information, request the EDD’s “Household Employers Guide 2004,” from the EDD website or your local EDD office.

Additional State Requirements

You must report your new employee to the Employment Development Department, P.O. Box 997016, MIC 23, West Sacramento, CA 95799-7016 (fax: (916) 653-5214) within 20 days of start of work. You can download the DE-34 reporting form at www.edd.ca.gov or request one at (916) 657-0529. You are also supposed to have a workers’ compensation policy to cover an in-home caregiver. If you have a homeowners’ policy, occasional sitters who work in your home are usually covered, but a full-time caregiver may require extra coverage. Some, but not all, renters’ policies cover household employees or can be written to do so. Check with your insurance agent about the coverage of your particular policy. If you don’t have coverage through your existing insurance, then you need to buy a policy. Many different companies sell workers’ compensation insurance. The least expensive policy to cover just one employee is usually available from the State Compensation Insurance Fund. For more information and a free pamphlet, contact the Fund at 577-3000; P.O. Box 12971, Oakland, CA 94604.

What If Two Or More Parents Share A Caregiver?

Each family must report and pay Social Security (and any other applicable taxes) individually on just the wages it pays the worker. No one family can file for the whole group. (BANANAS has a Handout, “Parent-Created Child Care – Shares” – available at our office or from our website – which goes into more detail.)

What Will It Really Cost To Hire An In-Home Caregiver?

As an employer you would pay the following taxes on your caregiver’s wages:

6.20% Social Security
1.45% Medicare
.80% Net FUTA after SUI credit; 6.2%-5.4% = .8%
3.40% Estimated SUI
.10% Training Tax
4.81% Estimated Workers’ Compensation

Total = 16.76%

For example, if you pay your caregiver $10 per hour, you would pay an additional $1.67 in taxes (16.76% of $10) for a total cost of $11.67 per hour. If you choose to pay your caregiver’s share of Social Security/Medicare taxes, which some families do, you would add an additional 76.5¢ (7.65% of $10) and not withhold this money from the employee’s check. The same applies if you elect to pay the State Disability Insurance, which would add another 0.9% to the above figure for 2003 and 1.18% in 2004. Given the complexity of the reporting requirements, one alternative to figuring out the taxes yourself is to hire a payroll service such as ADP or Paychex to do the work for you, for a fee.

Do I Have To Pay My Caregiver Minimum Wage?

The Federal government and California extend minimum wage protection to caregivers employed on other than a casual basis who either earn $50 or more in a calendar quarter or work more than eight hours in any workweek. This means the teenage babysitter who sits for you now and then is probably not covered by the current California minimum wage of $6.75 per hour. But you may have to pay more if you want to keep a caregiver for any length of time.

Summary

Parents who use the same in-home caregiver daily or frequently should investigate their reporting responsibilities. Many, if not most, parents who should pay taxes don’t – but problems can arise when a caregiver applies for Social Security benefits or if s/he is injured while working in your home.