Hiring Household Help
When Hiring Someone to Work in Your Home, Consider These Things First
Every year millions of Americans hire someone else to work in their home. It could be a one-time occurrence such as hiring a nanny to care for your child on a date night or a long-term hire of a personal caregiver to care for an ailing loved one. Often times, the hiring and employment process is done with little attention paid to the underlying issues that are present when hiring someone to work in your home.
When you hire someone to work in your home, one of the first things you should ask yourself is if the individual is your employee or an independent contractor. The range of risks and responsibilities you have can vary immensely depending on the answer.
According to the Internal Revenue Service (IRS) Publication 926, an individual is your employee if you outline what tasks to perform and the manner in which those tasks are performed. For example, you hire a nanny to care for your child three days a week. The nanny follows your specific instructions in preparing meals, entertaining your child, and putting your child to bed. The nanny is your employee. Publication 926 further specifies that an independent contractor is an individual who usually provides their own tools and supplies and performs a task you have requested, but in the manner of their own choosing. They also generally offer their services to the public as an independent business. A common example would be hiring a lawn care worker. A lawn care worker usually provides their own tools and supplies and offers their service to the general public. You may request them to mow your lawn and trim your hedges, but they determine specifically how to complete the tasks.
Hiring a Domestic Employee
When hiring a domestic employee, you should follow the same steps that any prudent person managing a business would follow. Employing someone has many implications from insurance to taxes, to even potential liability.
The individual you are hiring is likely a complete stranger, so adequate background checks should be completed. Checking personal and professional references is not enough. Other reports you will want to perform include a criminal background check and running a credit report. A credit report may not seem important, but remember the individual who will work in your home could gain access to your financial information (with or without permission). In addition, if the individual you are hiring will be driving your vehicle, contact your state motor vehicle department to run a motor vehicle report. Lastly, you need to check if the individual is legally allowed to work in the United States. All employers must submit to the U.S. Citizenship and Immigration Services verification that the employee is eligible to work in the U.S. You can go to www.uscis.gov to find out more information about your responsibilities as an employer to verify employment eligibility. Often times, these various reports can be very inexpensive and they are well worth it. There are even many reputable websites that assist employers with obtaining the various reports needed as part of the hiring process.
George Harrison of The Beatles famously wrote in the song “Taxman,”
Should five percent appear to small, be thankful I don’t take it all, cause I’m the taxman…
The lyrics from this song are humorous, but when it comes to the tax implications of hiring a domestic employee, the IRS is not laughing. Earlier in this article, the IRS’s definition of your employee as opposed to an independent contractor was described. It may be tempting to skirt around the issue of employer taxes by classifying someone as an independent contractor, but the IRS is well aware of this tactic. Publication 926 states when hiring a domestic employee, you may be responsible as the employer to pay social security, Medicare and unemployment taxes (federal and/or state). You may even need to withhold federal income taxes for the employee. It’s important before hiring a domestic employee to contact a Certified Public Accountant or tax attorney to find out what responsibilities you have as an employer to pay or withhold employment-related taxes.
A domestic employee could be working in your home several days a week. What happens if the family dog bites the employee in the course of their duties? Many homeowners may think that their homeowner’s insurance policy will respond, but insurance carriers may limit or exclude coverage for a domestic employee. Before you hire anyone to work in your home, it is important to check with your homeowner’s insurance carrier to see how your policy will respond if an employee is injured. It likely could be that this coverage would be excluded, especially in states where worker’s compensation insurance is required. Worker’s compensation can help pay for medical costs and loss of income your employee may incur from on the job injuries. Even if worker’s compensation insurance is not required in your state, it is still advisable to protect yourself from paying for potential medical costs and loss of income out of pocket. Contact an insurance agent to find out what coverage may be available.
Another insurance issue that can arise from hiring a domestic employee is liability for the employee’s negligent acts. Perhaps you have a nanny who drives your vehicle to pick up your child from school. One afternoon, the nanny fails to heed a stop sign and hits another vehicle carrying children. Liability could likely fall on the driver and you as the vehicle owner. If you live in a state where the vehicle owner’s auto insurance is primary, your insurance will respond first. A negligent act could also be committed by your employee at your residence. An example of this is a gardener who is trimming a tree branch that ends up falling on your neighbor’s car. These examples illustrate why it is important to talk to your insurance carrier about how your auto and homeowner’s insurance policies will respond to a negligent act committed by a domestic employee and also if any coverage gaps exist.
Hiring an employee and continuing to employ that person can present many potential liabilities for you as the employer. Even when you follow the best hiring practices, you could easily find yourself in a dispute with a current or former employee regarding wrongful termination, sexual harassment, discrimination, or more. One solution is to purchase employment practices liability insurance which is available as a stand-alone policy or in some cases a rider that is added to your existing personal liability coverage. Should a dispute with an employee arise, this coverage can help pay for the legal costs to defend you. There are many laws on both the federal and state level governing the hiring of employees that you will have to abide by. It is worthwhile to discuss your legal responsibilities as well as best practices with an employment practices attorney.
Licensing and certification may not come to mind if you hire a domestic employee. However, care should be given in this area as well. Some occupations, like hiring a private nurse to care for a loved one, require special licensing and certification. You will want to check your state’s requirements and verify this person has met all legal requirements. A nanny is an example of an occupation that may not have legal licensing and certification requirements, but having CPR and first aid training could be life-saving if your child were to stop breathing or become injured.
There are many things to consider when hiring a domestic employee and it may seem daunting. Thankfully, many agencies exist offering the services of everything from nannies to maids to home health care aides. You can shift the burden of being the employer to a reputable agency that will take care of background checks, licensing and certification requirements, insurance, taxes, and more. Before entering into an agreement with an agency to hire one of their employees, verify what the agency is responsible for as the employer.
What If I Am Not Hiring a Domestic Employee?
You may not have a need to hire a domestic employee. Perhaps you have a leaky pipe that needs to be fixed or you just need someone to mow your lawn while you’re out of town. If you’re hiring an independent contractor, you will still want to consider several things before you hire someone.
It is always important to verify that the individual or company you are hiring is licensed, insured, and bonded. They should have both liability and workers compensation insurance. Ask for references and ratings from independent rating services. There are many sources online. You will also want to verify that your homeowner’s insurance coverage is adequate should a theft occur. It may be hard for a television or appliance to be stolen without you noticing, but it could be several months before you notice a piece of jewelry is missing.
Many decades ago, Americans might have hired a stranger without little thought about the individual’s honesty or integrity. In 2016, individuals can ill afford to hire someone without considering both the financial and legal implications. River Capital Advisors, L.C. and our affiliated CPA firm, Smoak, Davis, & Nixon, L.L.P. is equipped to help you navigate through the myriad of financial issues that come up when hiring an individual. If you have any questions, please contact us.
This article is not meant to provide legal advice. Should you need legal advice, always contact an attorney.