The HomePay Blog

When things change, we're on it. If it concerns household employment,
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Income Tax Issues for Nannyshares and Part-Time Caregivers

by Breedlove June 30, 2015

When families hire a caregiver, their tax-related questions usually center on how much they'll have to pay and how much they'll withhold from their employee. That logic works fine generally in the commercial payroll world, but household employment has a few extra nuances, which is why speaking to a specialist is so important during the hiring process. With the prevalence of nannyshares and part-time caregivers, the following scenario could easily happen to one of your clients.

The Situation
The Clark and Stevenson families set up a nannyshare to make in-home care more affordable. They each paid the nanny $26,000 per year, meaning her total annual income was $52,000. Both families understood they were separate employers and asked the nanny to complete Form W-4 for each of them so they could withhold income taxes from her payroll. The nanny was used to being paid legally, so she had no problem filling out the W-4. Payroll ran smoothly with the nanny and both families - until tax season this year.

When the nanny went online to file her personal income tax return, she entered both of the W-2s provided to her by the Clark and Stevenson families. She was expecting a small refund, but was shocked to see she owed an additional $1,800 to the IRS. The nanny approached both families frustrated, and accused them of not accurately calculating her tax withholdings. To make things right, she wanted the families to cover the additional taxes she owed.

The Law
Household employers are not explicitly required to withhold income taxes from their employee. However, most employers do to keep the employee from having to budget for the taxes on their own. To withhold federal income taxes, employees must fill out Form W-4 and provide it to their employer.

In most circumstances, employees only complete the Personal Allowances Worksheet in order to calculate the allowances they will choose, as the other worksheets are typically only completed if the employee has a complex income tax situation. The employer should withhold the employee's income taxes based on how they complete the form. They are not responsible for making sure the employee chooses the appropriate withholding election for their situation.

Note: The requirement to withhold state income taxes is the same. If an employer lives in a state with income taxes, the employee fills out a state withholding form and the employer withholds state income taxes based on their elections.

The Outcome
Neither family understood how their nanny's tax issues could have occurred. To help reach a solution, the nanny told the families to call HomePay because we had handled her payroll for a past employer with no problems. The Clark family called and one of our Consultants explained that since they were in a nannyshare and the total wages paid to their nanny were more than $50,000, she should not have used the basic Personal Allowances Worksheet on the W-4.
Instead, she should have used the Two-Earners / Multiple Jobs Worksheet. Because of this technicality, both families withheld her federal income taxes based on a $26,000 tax bracket instead of a $52,000 tax bracket.

Gross Pay          $26,000.00       Gross Pay         $26,000.00
Income Tax       - $3,093.75      Income Tax       - $3,093.75
Social Security   - $1,612.00      Social Security  - $1,612.00
Medicare              - $377.00        Medicare           - $377.00
Net Pay             $20,917.75        Net Pay           $20,917.75

If the nanny would have had her federal income taxes withheld at the $52,000 tax bracket, her tax withholdings would have looked like this:
Gross Pay          $52,000.00
Income Tax       - $8,218.75
Social Security   - $3,224.00
Medicare              - $754.00
Net Pay              $39,803.25

As you can see, the difference in income taxes between the two scenarios is a little more than $2,000. The Consultant explained that the tax bill of about $1,800 was indeed accurate and the responsibility of the nanny to pay. However, since both families loved the work the nanny was doing and no one really knew what they had done was incorrect, they agreed to split the cost 3 ways. Both families also signed up as HomePay clients to make sure something like this never happened again.

A consultation like the one the Clark family received is something we recommend for all families to take advantage of. Unlike commercial payroll companies, HomePay experts can tailor payroll and tax advice to families in nannyshares or those with part-time caregivers who may have an additional job(s) on the side. This attention to detail keeps families and caregivers from having unpleasant conversations during tax season. Please let us know if we can ever assist one of your clients. We're here to ensure that they have an excellent employment experience - from paydays to tax time and all points in between.

Oregon Passes Domestic Workers Protection Act

by Breedlove June 18, 2015

On June 17, 2015, Oregon governor Kate Brown signed the Domestic Workers’ Protection Act into law – making the state the fifth to adopt a “Domestic Worker Bill of Rights” after New York, Hawaii, California and Massachusetts. The law goes into effect January 1, 2016 and covers most household employees. If you live in Oregon, be prepared to comply with the following new regulations:

- Household employees must be given 24 consecutive hours off each workweek. If they must work on their day off, they have to be paid overtime for every hour they work that day
- If the employee averaged 30 hours per week in the previous year, they are entitled to 3 paid days off each year
- Live-in household employees must be paid overtime for all hours worked over 44 in a workweek. Additionally, they must be given 8 consecutive hours off each day and adequate sleeping arrangements
- Household employees are now formally protected under state sexual harassment laws as well as harassment based on gender, race, national origin, religion, disability or sexual orientation

If you have any questions about how this new law will affect you or your household employee, please reach out to us at (888) 273-3356. It’s important to understand any changes to your employment relationship before the Domestic Workers’ Protection Act goes into effect.

Why Meals and Lodging Makes Payroll Complicated for Live-In Employees

by Breedlove May 28, 2015

When families make the decision to hire a household employee, many needs and wants are considered. Sometimes, the optimal solution is to hire a live-in employee. (A live-in employment arrangement is defined as a situation where the employee lives on the premises at least 5 full days per week or 120 hours per week).

However, families need to be aware that live-in employment arrangements come with specialized labor laws and payroll rules. Without the aid of a specialized tax expert, small mistakes/oversights can snowball into a huge mess.

The Situation
A family called HomePay earlier this year asking for help. They had been paying a live-in employee since mid-2014 and reported all of her wages like they were supposed to do. However, their employee was threatening to file a wage dispute saying she was underpaid.

The family explained they had been paying their employee $200 per week, plus furnishing meals and lodging, for 40 hours of work. They did not have anything in writing in regards to the value of meals and lodging, so their employee was complaining she wasn't being paid minimum wage.

The Law
Federal minimum wage is $7.25 per hour, but some states set higher minimum wage rates. At the federal level, meals and lodging can be either a tax-free benefit OR count toward minimum wage for a live-in employee. It cannot be both.

If providing meals and lodging benefits the employer and is a condition of employment, it is a tax-free benefit. If the employee voluntarily lives with the employer and chooses meals and lodging instead of additional wages, the value can be counted towards minimum wage and is considered taxable.
Regardless of which situation applies, employers should always include any meals and lodging deduction in their employee's contract to show it has been agreed upon by all parties.

Note: Each state is different in terms of whether the value of meals and lodging for state unemployment taxes and state income taxes (if applicable) is taxable, and the amount - if any - an employer is able to credit against minimum wage. Our HomePay consultants always have up-to-date information for all 50 states (and Washington, D.C.) should this issue arise for one of our clients.

The Outcome
Since the family did not have their employee's consent to deduct meals and lodging from her wages, we recommended they pay her an additional lump sum to at least bring her total for 2014 to minimum wage. The family agreed and ultimately signed up for our service so we could help them correct this payroll issue. Unfortunately, the family ended up having to cover both halves of Social Security & Medicare (FICA) taxes on the additional wages they paid their employee. This, along with the extra wages paid to the employee, made for a $3,000 payroll and tax mistake. Since we were able to help the family straighten out their payroll issues with their employee, she did not proceed with the wage dispute.

Disputes over the value of meals and lodging are not very common because the majority of families will pay a live-in employee more than minimum wage. However, the broader lesson is that a free phone consultation with a HomePay expert - during the hiring process - helps prevent expensive and frustrating problems. Whether it's navigating a common topic like overtime or a complicated payroll scenario like this one, understanding all the federal and state tax and labor law gives families and their caregivers peace of mind and, ultimately, a better financial relationship.

Workers Comp: An Often Overlooked Aspect of Household Employment

by Breedlove April 29, 2015

Workers' compensation insurance is a unique part of the household employment hiring checklist. It's not tied to the payroll and tax process, but can have a dramatic impact on a family's finances. The following incident is a prime example of why families need to inquire about workers' compensation before their household employee starts her first day of work.

The Situation
A family in Tennessee hired a nanny to take care of their 2 kids. The family lived near the park in their neighborhood, so it was part of the nanny's daily routine to take the kids there and let them have some play time outdoors. Unfortunately, only 3 weeks into the job, the nanny hurt herself while playing with one of the kids and was unable to walk back to the family's home. She was able to call the mother who quickly drove to the park, picked up the nanny and the kids and took the nanny to the emergency room.

The nanny's doctor informed her that it would be unsafe for her to care for the family's children for 3 weeks while she recovered. Between the emergency room visit, x-ray, MRI, arthroscopic surgery and 12 recommended rehabilitation sessions, the total cost of her care came to approximately $8,800. To make matters worse, the hospital informed the nanny that her insurance company refused to pay for her treatment because it was a work-related injury. The nanny and the family were both confused about what to do.

The Law
The majority of states require household employers to purchase a workers' compensation policy to assist their employee with medical bills and lost wages if they are sick or injured on the job. Even if workers' compensation isn't required in a family's state, they can still be held liable for the value of their employee's lost wages and medical bills in a work-related incident. Many families mistakenly believe their homeowner's insurance umbrella policy is sufficient for coverage. However, these policies are written for "guest workers" (i.e. a painter or plumber doing a short-term project) and do not cover an in-home employee.

Note: In California, a homeowner's insurance policy will cover a household employee provided they work 20 hours or less. If the employee works more than this, a rider must be purchased to provide adequate coverage.

The Outcome
Since Tennessee is not a state that requires household employers to have workers' compensation for a nanny, the family didn't break any employment laws. However, since the nanny's insurance company refused to pay for her medical bills, the family was stuck with the $8,800 bill - plus another $1,800 to pay their nanny for the 3 weeks of work she had to miss. In order to save a little money when their nanny was recovering, both parents used vacation time from their own job to watch their kids until their nanny returned to work. The family now has a workers' compensation policy - which costs them a little under $500 a year to protect them in case another accident occurs.

This case illustrates why it's a good idea for families to purchase workers' compensation, even it's not required by their state. This family unfortunately made a $9,000 mistake - largely because they weren't informed about workers' compensation during the hiring process. Had they received a thorough consultation from an expert like HomePay, we could have eliminated this risk. You can easily imagine a scenario where a household employee is injured on the job worse than this family's nanny. The resulting medical bills could be 2 or 3 times more expensive, which could cripple a family's finances.

This is why all families that come to our service have streamlined access to a workers' compensation solution during the HomePay setup process. In fact, almost all of our clients can receive a policy through our licensed insurance partner. We don't upcharge or make any money on these policies - it's just an added convenience for our clients so they can stay compliant in all aspects of household employment.

When Doing It Yourself Goes Wrong

by Breedlove March 26, 2015

When families hire a household employee for the first time and decide to handle employment responsibilities themselves, they are required to take on management of multiple disciplines (payroll, employment taxes and labor law/HR) at the federal, state and local levels – a complex morass of obligations that few have the aptitude or appetite to handle. With diligence, it can be done. Without it, however, oversights and omissions are commonplace. Unfortunately, even the tiniest of mistakes can result in a mess – as you’ll see in the following case study:

The Issue
A family hired their first nanny in early 2013 and decided to handle the household employment tax and payroll process on their own. In June 2013, the nanny was terminated because she wasn’t a good fit and a new nanny was hired a month later. The family reported all of the wages paid to both employees and filed their federal and state tax returns on time.

In April 2014, the family received a notice from their state’s Department of Labor that they owed an additional amount of unemployment insurance taxes for the first quarter of 2014. After another review of their mail from the state, they noticed that one of the letters they received in July 2013 indicated that the first nanny had filed for unemployment benefits. After thorough re-reads of other letters, they found a notice that their unemployment tax rate had changed.

The Law
In most states, unemployment insurance taxes are required to be paid and filed quarterly. New employers are assessed a standard rate for their first year and for years after, they are assigned an experience rate. The experience rate can increase for many reasons, but the most common are when the employer files a late tax return or a former employee receives unemployment benefits.

Additionally, employers that underpay their state unemployment insurance taxes are not eligible for the federal unemployment insurance tax credit. Federal unemployment insurance taxes are assessed at 6% on the first $7,000 of gross wages paid to the employee. However, when employers pay their full share of state unemployment insurance taxes, their federal unemployment insurance tax rate can be reduced by as much as 5.4%.

The Outcome
The family did not fully understand what the Department of Labor notices meant, but after spending several hours talking to representatives with the state tax agency, it became clear that their first nanny filed for, and was granted, unemployment benefits since they did not dispute the claim. As a result, the family’s experience rate was increased.

Since they did not realize this, the family had inadvertently miscalculated their state unemployment insurance taxes for the first quarter of 2014, which resulted in underpayment problems. The family had to amend their quarterly employment tax return and pay the additional taxes, plus penalties and interest. This amounted to roughly a $250 mistake – plus the time lost talking to the state.

When it comes to household employment obligations, this is a great illustration of the old adage “the devil is in the details.” This family was 99% compliant with their tax and payroll responsibilities, but neglected a couple of lengthy state notices and had a tax mess on their hands. As part of the HomePay service, we establish ourselves as the agent and mailing address for the state so our clients don’t have to worry about missing important notices like this. Anything that impacts their employee’s payroll or their taxes is communicated with them and adjusted on our end so they never have to question whether their state tax returns will be accurate. And our staff is always on hand to answer any follow-up questions that stem from these notices – or anything related to their payroll and tax needs.

Congress Discusses Increasing the Child Care Tax Break

by Breedlove March 9, 2015

Hiring someone to care for your child is an expensive undertaking. While the price continues to increase year after year, the tax breaks families are able to take advantage of for paying legally haven’t increased in a very long time. Specifically, the expense limit for a Dependent Care Account (FSA) hasn’t increased since 1986 and the expense limit for the Child and Dependent Care Tax Credit hasn’t gone up since 2003.

However, a bill was recently introduced in Congress to increase the Child and Dependent Care Tax Credit in order to make childcare a little more affordable. This bill is in its infancy and there is no way to tell yet if it stands a chance of passing, but it’s important for families to know that Congress is paying attention to one of the key things that ties up a family’s budget. We’ve long advocated for measures that help families with their childcare needs and will keep you updated with the latest information regarding this new bill.

As always, if you need help figuring out your tax breaks, use our Budget Calculator or give us a call. We’re here to help!

The No W-2 Dilemma

by Breedlove February 26, 2015

During tax season, we hear from many household employees who were paid under the table the previous year and now want help paying their taxes and reporting their income. Often they've just realized that taxes should have played a part in their compensation. But other times they're looking for advice because the family they work for doesn't wish to pay them on the books. This edition of The Legal Review shows what recourses employees have at their disposal and why families should not risk avoiding "nanny taxes."

The Situation
A caregiver called explaining that she had worked the final four months of last year for a family and earned roughly $6,000. The family did not withhold taxes from the caregiver and was not planning on reporting her wages. The caregiver was concerned with the fact that she would not be provided a W-2 and wanted guidance on how to report her earnings at the end of the year.

The Law
IRS Publication 926 states that families who pay a household employee $1,900 or more in a calendar year must provide them with a W-2 so they can file their personal income tax return. The deadline for employers to provide an employee with their W-2 is January 31. Employees that do not receive a W-2 by February 14 may reach out to the IRS for help. The employee provides their personal information, an estimate of their earnings and their employer's information. The IRS then sends a notice to the employer to let them know of their requirement to issue a W-2.

If still unsuccessful, the employee may report their income using Form 4852, which is a substitute for the W-2. In addition to reporting her income and any taxes that were withheld, the employee must explain how she tried to obtain a W-2 from her employer. Filing Form 4852 significantly increases the chance that the employer will be audited by the IRS.

The Outcome
Once we explained to the caregiver what she needed to do to try and obtain a W-2, she let the family know that she would be in contact with the IRS because filing taxes was important to her. The family, not wanting to risk an audit, contacted HomePay to assist with catching up on their taxes and getting their caregiver a W-2. Since they were only a few months behind, we were quickly able to file the delinquent state tax returns and prepare the family's year-end documents - including the nanny's W-2. The family and the caregiver will have no issue in filing their personal income tax returns before the April 15 deadline. And because the caregiver handled the initial conversation so professionally with the family, she is still working with them.

Scenarios like this are not uncommon. We work with families year-round that need help catching up on their household employment taxes. So if you have a client who keeps putting off these important items, let them know we're here to help. Our service is quick, efficient and designed to meet the needs of busy families. We'll have them caught up in no time!

Happy 20th Birthday Schedule H

by Breedlove February 20, 2015

Household employers have a few very unique tax rules to follow. The best example of this is having to attach a Schedule H to your personal income tax return. This form is strictly for reconciling household employment taxes, so only those who have hired a nanny, senior caregiver, housekeeper or other domestic employee have to remember to fill it out during tax season. But it wasn’t always this way.

In October of 1994, President Bill Clinton signed the Social Security Domestic Employment Reform Act into law. This bill set the parameters for how “nanny taxes” are handled today on the federal level – including the requirement for these taxes to be reconciled on your personal income tax return. That means this tax filing season marks 20 years of families having a much easier method of reporting the wages they pay to their household employee and letting the IRS know what federal taxes they paid throughout the year.

Note: Your state has its own requirements for handling household employment taxes. Make sure you understand how unemployment insurance taxes and income taxes should be remitted throughout the year. Our state-specific nanny tax pages are a good place to start.

So as you’re gathering your tax-related documents and hoping for the best from Uncle Sam, don’t forget about the Schedule H. And whether you file your income tax return online or not, make sure the amount of household employment taxes on your Schedule H shows up on Line 60a of your 1040.

Budgeting for Around-the-Clock Care and Sleep Time

by Breedlove January 21, 2015

In the nanny and senior care world, it's common for families to need their caregiver to work long shifts from time to time. Whether it's watching the kids for a whole weekend while Mom and Dad are out of town or taking an around-the-clock shift as part of an eldercare team, payroll can get tricky when overnight shifts are involved.

The Situation

A family wanted to take a weekend vacation and offered their nanny an extra $300 to watch the kids while they were gone. They normally paid her $10 per hour and felt this was more than fair compensation for her work over the weekend. However, while cancelling plans with a friend, the nanny's friend told her she should receive overtime for working these additional hours. By her friend's calculation, the nanny would be working her normal 30 hours during the week and then an additional 48 hours over the weekend for a total of 78 hours. If she was paid 40 hours at her regular $10 per hour and 38 overtime hours at $15 per hour, she should be paid $970 for the week instead of $600. The nanny brought this up with the family who didn't know what to do.

The Law

The Fair Labor Standards Act (FLSA) states that overtime must be paid for any hour over 40 that a non-exempt employee works in a 7-day work period. The rate at which overtime must be paid is 1.5 times the employee's regular rate of pay. The Fair Labor Standards Act classifies household employees such as nannies and senior caregivers as non-exempt workers.

If an employee is required to be on duty for 24 hours or more, the FLSA permits a sleeping period of up to 8 hours to be excluded from hours worked. This exclusion applies if the employee is provided adequate sleeping facilities and is able to sleep for at least 5 consecutive hours uninterrupted by work-related duties.

NOTE: In California, the state Supreme Court recently ruled that the federal sleep time exemption is not permissible unless it is specifically stated in a Wage Order. Since sleep time is not addressed in Wage Order 15 (the Wage Order for household employees), California families cannot exclude sleep time for 24-hour shifts.

The Outcome

The family contacted HomePay to determine what their legal requirements were. A consultant explained they were not required to pay their nanny for up to 8 hours of sleep during her 2 overnight stays since she would have her own room and the kids generally slept through the night just fine. This meant they needed to pay their nanny for 40 regular hours and 22 overtime hours (excluding 16 hours for sleep time), for a total of $730 for the week. Even though it was still more than the $600 the family budgeted for, they understood the reasoning behind the law and were ultimately grateful they were able to resolve the situation before they left for the weekend.

What could have been an ugly overtime situation was prevented by the family contacting HomePay before they paid their nanny. We encourage families to contact us at any time if you have a question about payroll, taxes or labor law. We're here to help. And it's always easier to prevent mistakes than fix them.

What Families Need to Know About Companion Care

by Breedlove January 6, 2015

For several decades, home care “companions” have provided care to elderly individuals. The employers of these workers (whether privately employed by the family or employed by a third-party Home Care Agency) were not required to pay overtime (nor minimum wage in some states). This has been known as the “Companion Care Exemption” because these workers were exempt from federal wage and hour law as defined by the Fair Labor Standards Act (FLSA).

The effect of this exemption has been to keep wages low, thereby making overall care costs more affordable. However, worker advocacy groups have argued that many senior care workers live at or near the poverty level, despite working very long hours. As a result, the industry has frequently struggled to attract enough high-quality workers – a shortage that many experts predict will become more dramatic as our citizenry ages.

The DOL Announces Changes
In late 2013, the Department of Labor announced two changes. First, they said that the Companion Care Exemption would only apply in cases where the family is the direct employer. Therefore, all third-party workers (employed by a Home Care Agency) would be entitled to overtime effective January 1, 2015.

Second, the DOL narrowed the definition of “companion care.” It is now defined as service that is predominantly fellowship and protection in nature. If a worker is asked to keep the patient company (reading, watching TV, talking, playing games, strolling, etc.) and safe (make sure the gas on the stove is turned off, the heater is working, etc.), they can be classified as a companion – as long as less than 20% of the worker’s time is spent on ADLs (Activities of Daily Living such as bathing, dressing, meal preparation, light housekeeping, etc.).

The DOL Gets Challenged
The National Association of Home Care and Hospice (NACH) as well as the Home Care Association of America (HCAOA) challenged the Department of Labor, arguing that such a radical change would destabilize the industry and make care unaffordable for many elderly Americans. They asked U.S. District Judge Richard Leon to eliminate the DOL’s disparity between third-party employment and private employment as criteria for exemption and, secondarily, they asked the court to strike down the restricted definition of companionship services and reinstate the decades-old definition.

In late December, the court ruled that the DOL had overstepped their regulatory authority in this case. Despite pronouncing his opinion that caregivers should be entitled to overtime, the judge ruled that it was up to Congress, not the DOL or the judiciary. He thereby eliminated the requirement that third-party employers must pay overtime to all workers.

The Conclusion (For Now)
On January 14th, the judge ruled all provisions of the enhanced companion care exemption be vacated. This includes both the restrictions on third-party workers and the narrowed definition of "companion care," which essentially means all federal laws regarding companion care remain unchanged - for now. It is possible for the Department of Labor to appeal this decision, so continue to stay tuned as we will update you when information becomes available.

If you are hiring companion care or senior care, it's important to determine the kind of care and the amount of care your loved one needs. If your loved one is independent and only needs someone to help with fellowship and safety, a companion caregiver is likely the most affordable option for you. If your loved one needs more assistance and the schedule is going to require more than 40 hours each week, you should budget for overtime (1.5 times the regular rate of pay) or consider a team of caregivers in order to stay under the overtime threshold. 

If you have more questions about the rulings or your situation, please don’t hesitate to call us for a free personalized phone consultation. We’re here to help!

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