Payroll and Workers Comp (1099 or W-2 employee) for your Learning Pod

September 15, 2020

The good news is that while there are a few things to tick off regarding payroll, tax, and workers compensation, it's a well worn path and you just need to know what questions to ask and what third party resources to use. Given the right direction, these issues should be fairly straightforward to complete.

Summary (TL;DR)

  • Most at-home teachers may be classified as employees, not contractors.
  • Payroll services designed specifically for household employers (i.e., families) cost $500-1,000 per year and they handle everything. We can make introductions to recommended services for you.
  • Tax credits are available if teachers are classified as employees. These tax credits likely offset most of the additional costs associated with payroll services and payroll taxes.
  • Filing as a household employer provides benefits to the employee (e.g., unemployment benefits, social security) and, net after tax credits, may not result in much additional expense. In fact, you may even come out ahead!
  • If the teacher is classified as a full-time employee, workers compensation insurance is likely required by your state.
  • Worker’s compensation insurance reduces ongoing liability (e.g., lost wages, medical expenses) associated with injuries suffered by your employee. Annual cost may range from $300-1,300.

Classifying your Teacher as a Contractor (1099) vs Employee (W-2)

Most likely, your learning pod teacher is an employee of yours

According to Nanny.org, the IRS has ruled definitively that most household workers are employees of the family for which they work. The difference between employees and independent contractors hinges on the amount of control one has over the worker, and a family directly hiring a teacher to work in their home may be deemed to have significant control over how the teacher performs their work. And if the family controls work hours, the work place, responsibilities, and work tools, the teacher is their employee and not an independent contractor.

As an aside, you should know that an independent contractor has greater tax responsibility than an employee because they have to pay both the employee and employer taxes.

The IRS generally views household workers to be employees. If you’d like a formal ruling, you can obtain one from the IRS by filling out Form SS-8.

What are “Nanny Taxes”?

According to Homepay, the “nanny tax” is a combination of federal and state tax requirements detailed in IRS Publication 926 that families must manage when they hire a household employee, such as a nanny, senior caregiver, or, in the case of a learning pod, a teacher. The taxes include:

  • Taxes withheld from the employee: Social Security and Medicare taxes (FICA), as well as federal and state income taxes.
  • Taxes paid by the employer: Social Security and Medicare taxes, as well as federal and state unemployment insurance.

For tax year 2020, nanny taxes come into play when a family pays any household employee $2,200 or more in a calendar year (or $1,000 or more in a calendar quarter for unemployment insurance taxes).

Your tax obligations will vary by state and where you live.

Taxes as a household employer

Household employers can expect to pay the following employment taxes:

  • Share of Social Security and Medicare (7.65%)
  • Federal and state unemployment insurance

These employer taxes are typically about 10% above the employee’s gross payroll. Employers often qualify for favorable tax breaks that will largely offset their employer taxes.

Tax breaks as a household employer

These benefits are only available if the employee is paid legally.

  • Dependent Care Account. Most companies offer a type of flexible spending account (FSA) that allows employees with child or dependent care expenses to contribute up to $5,000 of their pretax earnings to an individual Dependent Care Account. The money in this account is then used to cover childcare expenses, free of taxes. The savings are approximately $2,300 per year.
  • Child or Dependent Care Tax Credit. For those who don’t have access to a Dependent Care Account, they can claim the Tax Credit for Child or Dependent Care (Form 2441) on their income tax return at year-end. Basically, they can take a tax credit of 20-30% of qualifying childcare expenses. But only expenses of up to $3,000 for one dependent, or up to $6,000 for two or more dependents can be counted.

You may be able to take advantage of both tax credits. For most families, you can only avail yourself of one of the two tax breaks, with the larger one being the Dependent Care Account.

Benefit of paying employment taxes

Employers

  • In some cases, savings from tax breaks exceed the employer’s share of taxes - actually saving money by being legal.
  • Less to worry about if they are audited by the IRS or state.
  • Allows the employer to offer a more attractive opportunity for your employee by allowing them to earn years of service for social security and eligibility for unemployment benefits.

Teachers and caregivers

  • Social Security income and Medicare coverage upon retirement.
  • Unemployment benefits if they lose their job due to no fault of their own.
  • A verifiable employment history necessary for obtaining auto and home.
  • Reduced health care costs via subsidies provided through the Affordable Care Act.
Services to help you manage payroll

There are a number of options that will take care of all payroll operations for a monthly fee. Total annual costs can range from $500-1,000 per year. Contact us for recommended services.

Workers Compensation

What is workers compensation?

Workers compensation insurance covers the financial risk and liability associated with work-related injuries or illness suffered by employees. Typically, claims cover the cost of the employee’s medical bills and lost wages while they’re out of work. Families generally pay an annual premium for coverage.

While independent contractors are generally not eligible for workers compensation coverage, they may be misclassified by their employers.

What does this cost?

According to Homepay, annual expenses for a household employer of a teacher could range from $300-$1,300 depending on state and vendor.

Why is workers compensation insurance so important?

In the event of a workplace injury, families could be held liable for the amount of workers compensation benefits. This could mean the teacher's medical expenses and lost wages would come out of pocket from the household employer.

It’s legally required in most states. Non-compliance could result in fines.

Finally, another benefit of having workers compensation insurance is that employees who accept benefits generally are required to forfeit their right to sue the employer, regardless of fault.

Why wouldn’t my homeowners insurance cover my caregiver?

Consult your insurance representative. Homeowners insurance may cover some, but not all, of the liability associated with workplace injuries suffered by household employees. Homeowners insurance usually pays out a single claim, not ongoing payments such as medical expenses or lost wages. And finally, workers compensation is mandatory to be purchased by employers in most states.

Are household employers required to purchase a workers compensation policy?

Most states require families to have a workers compensation policy if they hire a caregiver to work in their home. View requirements in your state. Even if it weren’t mandated by the state, there are many reasons a household employer should obtain workers compensation insurance including reducing your potential liability.

Do I need workers compensation insurance if I have a personal liability coverage under my homeowners or renters insurance?

While personal liability coverage may cover any initial claim, it would likely not cover ongoing claims (e.g., disability) that worker’s compensation coverage does.

Again, it’s also mandated by most states for employers.

Credit to Nanny.org, Care.com, and Homepay

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Note: Because there are facts and circumstances unique to each learning pod, confirm all details with your legal, tax, or insurance advisor/provider. The information provided, in this article and anywhere on our site, is for general informational purposes. It is not, and is not intended to be, legal, accounting, tax, or employment advice.

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