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.
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:
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.
Household employers can expect to pay the following employment taxes:
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.
These benefits are only available if the employee is paid legally.
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.
Teachers and caregivers
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.
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.
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.