Hiring a Nanny Legally: Are Nannies an Independent Contractor or an Employee?

Article courtesy of Breedlove & Associates Nanny Tax Preparation

If you are hiring nanny services, it is important to thoroughly understand the legal relationship you are entering into.  Nanny jobs and other domestic work arrangements are virtually always classified as household employee relationships.  This means that the nanny or au pair is granted full employment rights and obligations, which differ substantially from those of an independent contractor.

What is the difference between Employees and Independent Contractors?
This is generally defined by the work relationship; how much direct oversight or “control” the person hiring has over the person doing the work.  If an employer is able to control the schedule and number of hours worked, as well as provide instructions as to the specific way in which the work is completed, this is considered employment.

But if the person doing the work sets her own schedule, avails her services to the general public, and is only obligated to complete a job and not directed much as to how, then she is considered an independent contractor.

Examples
This is an employee relationship:
Marissa finds a nanny job. The family hires her services, with the understanding that they include babysitting their 3-year-old child in their home all day for five days a week, plus additional and clearly defined household chores. Marissa adheres to the family's specific requirements about how to take care of the child and complete other chores in the home. Under this arrangement, Marissa is an employee.

This is an independent contractor relationship:
A family employs Ted to install an irrigation system for the organic vegetable garden. Ted brings all of his own equipment and tools. If any extra manpower is required, he pays his subcontractors directly.

Now, when it comes time to pay taxes, Ted is completely responsible. The family has paid him whatever fees he has charged, and is in not obliged to withhold taxes or provide other benefits.

Because Sue is a household employee, however, the family that hires her must pay half her Social Security and Medicare Taxes, plus state and federal taxes, unemployment benefits and Workers' Compensation. In addition, the family is encouraged to withhold Marissa's state and federal taxes, along with her half of Social Security and Medicare taxes and remit withholdings to the IRS along with Social Security and Medicare.

Complying with Labor Laws
The IRS has left little room for doubt when it comes to household workers like nannies and au pairs; they are employees, not contractors. Therefore, it is important not misclassify an employee as a contractor. This will leave you, as an employer, vulnerable to fines and interest on top of having to turn in the full tax burden including Social Security and Medicare.

If you're unsure whether or not the nanny you are hiring can be classified an employee or and independent contractor, we strongly recommend that you request a formal ruling from the IRS, by having your nanny fill out her part of form SS-8 before you mail it to the IRS. You will then hear back as to how to classify your nanny.

We thank Breedlove & Associates for this article. Breedlove can vastly simplify the payment of your taxes for a very reasonable fee. They're always willing to take your nanny tax calls at: 888-273-3356.

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