When you work in someone’s home and have specific job duties set by the homeowner, the IRS considers you a household employee, not an independent contractor. For example, if you are a nanny, the parents might give you a daily schedule, telling you where, when and how you will be taking care of their kids.
It doesn’t matter if you are paid hourly, daily, weekly or by the task. For tax purposes, you have an employer-employee relationship, and your employer should be withholding and paying certain taxes.
- Complete Form W-4 before you begin working for a family.
- If you make more than $2,200 you are considered an employee, not an independent contractor.
- If you work part-time and make less than $2,200 or get paid under the table you will need to file a personal income tax return.
- Ensure you receive your W-2 form(s) by January 31st.
- Run a payroll scenario to see how taxes work
What if the family wants to pay me cash?
At first it may seem easier for you and the family to just do cash payments, however, you still owe the federal and state income taxes when you file your personal income tax return. This is because the IRS requires you to pay taxes on any wages you earn throughout the year. Therefore, you should insist on completing a W-4 before starting to work. You are a professional and should be treated as such.
There are several short and long-term benefits to being paid on the books. It’s important to have a traceable employment history so that you can apply for a mortgage, loan, credit card, or a lease. Also, you would qualify for unemployment benefits which means you could earn 50% of your salary for up to six months. Your employer pays taxes to provide this benefit.
If you are paid on the books you could qualify to pay a lower health insurance premium under the Affordable Care Act. You would only be able to take advantage of this benefit if you are paid legally.
Another important benefit is Social Security and Medicare credits. Throughout your lifetime a portion of your taxes goes towards Social Security and Medicare that you can access after you retire. Social Security provides a source of income once you are retired and are no longer working. Medicare provides health insurance once you are retired and no longer working and receiving health insurance through an employer or on your own individual plan. Most Americans can expect to receive $1.50 for every dollar they paid in taxes over their lifetime. Your employer matches the amount you paid to go towards Social Security. Therefore, if you are never paid on the books you will not receive this money once you retire and will probably not be able to stop working.
So although it may seem nice to be paid in cash, it’s essential that you are paid on the books to receive these significant benefits.
What if I just have a temporary or part-time job?
Even if you are just working temporarily or part-time you still need to keep track of your income and pay taxes on those earnings.
You are still considered an employee for the family and will pay taxes as such. You are NOT considered an independent contractor so do not accept a 1099 from a family. That’s actually illegal. You should receive a W-2 from the family at the end of the year even if you only worked part-time or for a short period of time.
If you receive $2,200 or more in a calendar year, they must follow household employment tax withholding and reporting obligations. Social Security, Medicare and income taxes will be withheld from your pay and the family will pay some employment taxes as well.
However, if you earned less than $2,200 from a family the employer does not need to withhold taxes. This is sometimes referred to as the “casual babysitting exemption.”
Therefore, it is essential that you track your earnings from each family so that you know if the family should withhold taxes and provide you with a W-2 at the end of the year.
You are a professional and should be treated as such. In other professions, taxes are withheld so that earners receive long-term benefits such as Social Security and Medicare which provide a source of income once people retire and are no longer working. If taxes are not withheld, you may have no choice but to work for the rest of your life. Also, you would not be eligible for unemployment benefits if you lost your job. It’s essential that you are a self-advocate and insist on being paid legally if you earn over $2,200 from a family.