Key Tax Tips for Taxpayers Employing Household Staff
If you are a CPA or tax professional who has clients that pay household employees, then you will need to show special attention to additional paperwork, rules, deadlines and certain labor laws. Household employees include anyone that the client pays to do domestic work. These people are not commercial employees, so the entire process involved in handling tax laws is different. Such employees of the client may include housekeepers, nannies, gardeners, senior caregivers and others.
Clients that employ household workers sometimes overlook some of the technicalities involved. Often times the client is not familiar with rules and regulations for employing other people, so it is likely that they will make a mistake in payroll, tax laws or even labor laws when dealing with their own domestic worker. There’s some things that the CPA or tax professional can tell the client to help avoid mistakes. Passing this information along to those certain clients can save a lot of time and energy correcting their mistakes.
Domestic workers and employees are technically the same thing.
The IRS has made it publicly known that all types of domestic workers should be classified as employees for tax purposes. The publication known as IRS Publication 926 can be found online, and it clearly defines this matter. Printing this publication for clients, sending it in an email to them or simply telling them about it prevents misunderstandings. Without expressing certain facts like this and making them known to the client, the client is free to believe misinformation he or she stumbles upon on the internet or hears from a friend or family member.
Typically, the mistake is made by the employing family to treat the worker’s tax documents as if they were a contractor’s documents. The families that issue an independent contractor 1099 form to the domestic worker are committing a crime of tax invasion. The IRS and Department of Labor are strictly enforcing this ruling and calling it a mis-classification of the domestic worker.
The employing family should discuss all aspects of pay and taxes when hiring a domestic worker.
The transparency involved in discussing what goes on with the worker’s paycheck from the money they make and what gets held in taxes is beneficial for both parties to understand. Tackling this important issue as early as possible will help avoid any miscommunications and stresses about pay and taxes.
Advise your clients to be honest about pay and tax withholding during interview and hiring processes. This full disclosure can include multiple scenarios to display, for the potential employee, how much they will learn on their pay day. Reminded the client that their employee may not be familiar with the way taxes are withheld because the employee may have an independent contractor background.
Advise your clients to clearly define with their employee about the expected amount they will earn per hour.
The client should already be familiar with the difference between salary and hourly, but they will tend to offer a salary to their worker instead of hourly. This can cause confusion and problems when filing taxes because the hours the employee works are subject to change. Technically speaking, the Fair Labor Standards Act classifies household employees as non-exempt workers, so they must have a clearly defined hourly rate of pay.
Check on the rules for overtime in your state because most household employees are eligible to earn an extra incentive for working more than 40 hours in a week.
Clients should talk to their employee about the issue of getting paid time off.
Paid time off for vacations, illnesses or holidays is not mandated for household employees, according to federal mandates. There are, however, states that do require it, so make sure you are familiar with it and know the rules in your state before discussing this matter with your client. Even if it is not required legally, it is often a good idea to give some paid leave. Paying for leave time for the employee ensures that he or she is happy and healthy, and this will be reflected in their quality of work.
There is a difference in deadlines when the client has household employees.
Filing for domestic workers cannot wait until the last minute. It is not something that can wait until tax season comes around. These filings are throughout the year for many states. Warn your client that waiting until the last minute to file worker taxes often results in more fees because of mistakes that can occur on the client’s behalf.
These tips can save the client a lot of money. Furthermore, they can save the CPA or tax professional a lot of time, frustration and energy.
Hopefully, this article makes you think about how to advise your clients with regards to tax simplification. With this in mind, if you’re not already filing clients’ taxes online, you should definitely consider it. When you efile 1099 and W-2 tax forms, you’ll notice results faster. I urge you follow my lead if you’re spending too much time printing and mailing tax forms. I use eFile4Biz.com to file 1099 forms online. They save me precious time I could be seeing clients, as opposed to standing next to a printer and stamp machine. The video below shows you more.
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