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It’s an open secret that many people employ household help, such as a home aide for an elderly or ailing parent, and pay them “off the books.” Even a prominent lawyer who was once nominated to be U.S. Attorney General was forced to withdraw and pay a fine, when it was discovered that she had hired illegal immigrants to serve as her chauffeur and nanny, and failed to pay their Social Security taxes. However, the lessons of “Nannygate” continue to be ignored, apparently because complying with applicable laws is annoying and costly, and the alternative of using a home care agency means paying higher rates.
Risks and Rewards
Everyone likes a “good deal,” but sometimes that good deal comes with risks that are too casually undertaken. Employing a home aide “off the books” is one of those times. It is really not a good idea. Even if you think that your chances of being caught are small, you should consider the fact that the liabilities and consequences can be extremely serious if you are wrong.
Employer and Employee
The person who employs a home aide may persuade himself (or pretend) that the aide is an independent contractor, not an employee. Generally, an employee is someone who receives fixed wages, and who is subject to the direction and control of the employer (i.e., days and hours of work, and tasks to be done, set by employer). On the other hand, an independent contractor is engaged for a particular project, performs her work outside the supervision or control of the employer, furnishes her own tools or materials, makes a profit or loss based on the agreed compensation for the project, and has a separate tax identification number (EIN). As you can see, a home aide will almost always be an employee.
Who is the employer may be a more difficult question. Several government agencies impose obligations on employers, but their definitions are not uniform. For example, an adult child who arranges for a home aide for a parent and who pays the aide from the parent’s checkbook, might be deemed the employer by the Workers’ Compensation Board, even if the parent is deemed the employer by the Internal Revenue Service. Who is deemed the employer is important, as significant liabilities can be incurred if problems arise.
The Internal Revenue Service has specific rules for household employees. As discussed above, if you hire an individual to perform regular services in your home as an aide, companion, or private nurse, that person is almost surely going to be a household employee within the meaning of IRS rules.
If you have a household employee, you will likely need to withhold or pay Social Security and Medicare taxes, and pay federal unemployment tax. If you pay your worker wages totaling $1,800 or more in 2013, then you are required to withhold or pay Social Security and Medicare taxes. It is the responsibility of the employer, not the employee, to pay these taxes, either through withholding from the employee’s paycheck or from the employer’s accounts. (You are not required to withhold federal income tax from wages paid to your household employee, and should only withhold if the employee requests withholding and you agree.)
If you pay wages of $1,000 or more in any calendar quarter of 2013 (a calendar quarter is January through March, April through June, July through September, or October through December), then you are required to pay federal unemployment tax. You may also need to pay New York State unemployment tax for your household employee. The New York State Department of Taxation and Finance has published a very useful guide on Hiring Household Help, which you can find online at: http://www.tax.ny.gov/pubs_and_bulls/tg_bulletins/mu/hiring_household_help.htm
If you pay Social Security and Medicare wages, federal unemployment wages, or wages from which you withhold federal income tax, you are required to file certain forms. First, if you do not already have an Employer Identification Number (EIN), a 9-digit number issued by the Internal Revenue Service to employers, then you must obtain this number to include on the forms you file for your household employee. You may apply for an EIN online at:https://sa1.www4.irs.gov/modiein/individual/index.jsp
Second, you will need to file a separate Form W-2 Wage and Tax Statement for each household employee to whom you pay Social Security and Medicare wages, or wages from which you withhold federal income tax, and provide the W-2 to your employee by January 31st of the following year. If you pay the above wages or federal unemployment tax wages, then you also must file Schedule H with your own personal federal income tax return. For specific filing information, see IRS Publication 926, A Household Employer’s Tax Guide, available online at: www.irs.gov/publications/p926
Failure to report wages paid to your household employee will compromise the validity of your personal income tax return. There is no statute of limitations on the failure to report and remit your federal payroll taxes. Consequences may involve payment of back taxes, interest and penalties, or even the possibility of criminal prosecution.
Minimum Wage Requirements
Under the federal Fair Labor Standards Act and the New York Domestic Worker Bill of Rights, a household employee is entitled to minimum wages for all of the hours that he or she is required to be present in the home, and for all hours performing duties elsewhere. In 2013, the minimum wage is $7.25 per hour for the first 40 hours (44 hours if the home aide is a live-in), and time and a half for hours above such amounts. The minimum wage will increase to $8.00 per hour in 2014, and is subject to annual increases thereafter. The employee is entitled to 24 consecutive hours off every 7 days, unless waived by the employee.
Workers’ Compensation and Disability Insurance
In New York State, an employer must provide Workers’ Compensation and Disability Insurance to household employees who work 40 or more hours per week. If your employee works less than 40 hours per week, it would still be prudent to obtain this insurance (which is not very costly).
The consequences of failing to obtain this insurance can be extremely serious. The employer has unlimited personal liability. According to the Workers’ Compensation Board website, “. . . an employer is liable for a penalty of $2,000 per 10-day period of noncompliance, plus the actual award (including both compensation and medical costs), plus any other penalties the Board assesses for noncompliance. In cases involving severely injured employees, the medical costs alone could be in the hundreds of thousands of dollars per injury.” This website may be found online at: http://www.wcb.ny.gov/content/main/Employers/noncompliancePenalty.jsp#sec3
The Immigration Reform and Control Act of 1986 and other laws prohibit the hiring or continued employment of unauthorized aliens. The employer has an affirmative obligation to verify in “good faith” the identity and employment eligibility of employees by examining the documents required by Form I-9, the Employment Eligibility Verification Form issued by the Department of Homeland Security. An employer is permitted to rely on original documents that reasonably appear to be genuine and relate to the person presenting them.
If an employer knowingly hires or continues to employ an illegal alien, the financial penalties can become significant. The penalty for a first violation is a fine of not less than $275 and not more than $2,200 for each unauthorized alien. A second violation is a fine of not less than $2,200 and not more than $5,500 per illegal alien. A subsequent violation is not less than $3,000 and not more than $10,000 per illegal alien. Employers who engage in a pattern or practice of hiring illegal aliens may be subject to criminal prosecution.
The immigration status of your household employee does not have any impact on your obligations to pay employment taxes. The Internal Revenue Service requires that workers who are ineligible for a Social Security card must file Form W-7 to request an Individual Taxpayer Identification Number (ITIN). Employers may then issue a Form W-2 to the worker, and the worker may file her federal income tax return as a resident alien. The ITIN does not confer eligibility for employment or legal immigrant status. The IRS is currently prohibited from sharing the tax information with Immigration and Customs Enforcement.
If you are applying for Medicaid Home Care, Medicaid benefits are retroactive for up to three calendar months prior to the first day of the month in which the Medicaid application was filed, provided that the applicant was financially eligible for Medicaid during this period. As a result, once the Medicaid application is approved, reimbursement of expenses paid during the retroactive period can be obtained for the hours approved by Medicaid, at the Medicaid rate. You may also be eligible for reimbursement of home care expenses incurred during the period that your Medicaid application is pending approval. Of course, once the application is approved, Medicaid will pay the home care provider directly.
It should be obvious that Medicaid is not going to reimburse you for any amounts paid to an “off the books” employee. In fact, it may be extremely difficult to obtain reimbursement for any home care expense, unless it was incurred with a Medicaid licensed home care agency.
What to Do
All of the problems described in this article can be avoided by employing a home aide through a licensed home care agency (a Medicaid licensed agency, if you wish to seek reimbursement of expenses incurred prior to Medicaid approval).
However, many people want to employ, or continue to employ, home aides of their own choosing on an independent basis. If you wish to do so, here is a checklist of the actions that you should take:
- Obtain a tax identification number (EIN) from the Internal Revenue Service — http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Apply-for-an-Employer-Identification-Number-%28EIN%29-Online
- Register as an employer with New York State — http://www.labor.state.ny.us/ui/employerinfo/registering-for-unemployment-insurance.shtm
- Confirm that your employee is eligible to work — http://www.uscis.gov/files/form/i-9.pdf
- Obtain NYS Workers’ Compensation and Disability Insurance
- Consider using a payroll service, such ADP, Paychex, Intuit, or any other (optional)
Complying with the legal requirements for employers may appear to be more onerous than doing so really is in practice. Your attorney or accountant can help, if you need assistance.