J & N REALTY, INC.

How to Properly Hire and Employ a Nanny or Housekeeper  

EXECUTIVES OFTEN PAY law and accounting firms top dollar to handle their business affairs but with domestic workers permit obvious legal violations in their homes.  When households hire domestic help but do not pay employment taxes or follow basic employment laws, peril looms near.  Following the law means that employers will have to take some steps, but this is a worthy time investment.  Before establishing legal employment, consider who is a domestic employee and who is not.  If someone cleans house once a week, earning less than $750 per calendar quarter, the employer is permitted to pay cash.  Housekeepers who earn more than $750 per quarter are employees, and they must be treated as such. 

Taking seven basic steps in hiring domestic employees can prevent a variety of legal problems.  First, check the applicant’s references.  Employers should ask applicants to provide contact information for their last few jobs.  If an applicant has not recently worked in household care, the employer should ask to speak with three people who can verify the work ethic or trustworthiness of the applicant, such as a teacher, church leader, or family friend. 

Second, every employer should verify an employee’s right to work in the United States.  No later than the first day of work, the employer must give the employee the U.S. Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification.  The form has detailed instructions on how to complete the employee section and the employer section.  The completed and signed I-9 form should be kept in a confidential file.  It is legal to make photocopies of the employee’s identification cards that are presented to support the I-9. 

Third, employers should consider background checks.  A background check will verify that a new hire does not have a recent criminal record or child abuse history.  If an employee will be handling money, the employer may also be able to perform a credit check.  Many companies offer advice on these options and, for a fee, provide the consent forms needed to conduct a legal background check. 

Fourth, every employer should obtain an employer identification number.  To register as an employer of a domestic employee, notify the state tax authority.  In California, employers have 15 days to register with the Employment Development Department (EDD) after paying $750 in wages during a calendar quarter to a domestic employee.  To register with the EDD, complete a Registration for Employers of Household Workers (DE-1HW), which is available on the EDD Web site.  The employer will be assigned an EDD account number.  The employer also needs a federal Employer Identification Number or EIN.  This number may also be obtained online  

Fifth, employers should determine how to handle taxes and withholdings.  The employer’s share is 7.65 percent (6.2 percent for Social Security tax and 1.45 percent for Medicare tax) of the employee’s Social Security and Medicare wages.  The employer must withhold the same percentages from the employee’s wages for each pay period.  In California, employers are obligated to pay two additional taxes on an employee’s wages: unemployment insurance and employment training tax.  How-to information is easy to find online.  

Sixth, obtain an employment agreement.  A well-thought-out employment agreement is a great way to start an employment relationship with clear terms and expectations.  An agreement should include hours, pay rate, expectations, and prohibitions.  Holidays, paid vacation, paid sick days, and any other perks are always appreciated and best understood when set out in advance. 

Seventh, keep records.  It is recommended that household employers keep a daily log of the employee’s hours.  This can be as simple as a 12-month calendar with the hours or wages written in daily.  All tax documents and filings, including daily wage reports, should be kept for four years after the tax return filing date.  Failure to pay taxes on household employees may subject employers to back taxes, penalties, and interest.  The most common way that state or federal tax authorities learn that someone has employed a household employee is that the employee files for unemployment or for disability benefits.  

Employers are not required to withhold federal income tax from the wages paid to a household employee.  An employer should withhold federal income tax only if the household employee asks and the employer agrees for it to be withheld.  If this happens, the employee must give the employer a completed Form W-4, known as the Employee’s Withholding Allowance Certificate, which is available from the IRS Web site.  Tax withholding is generally handled by the employer.  If the employee does not agree to the withholding of income taxes, he or she remains responsible for reporting all wages and paying all personal income taxes due. 

In California, those who pay more than $20,000 in wages to an employee are required to submit quarterly tax payments.  Those who doubt they will find the time to calculate taxes, submit quarterly wage reports, and issue payroll checks may engage a payroll service provider to assist with these tasks.  The paperwork involved with legally hiring a nanny or housekeeper can also be entrusted to a CPA, who can make sure that the household employee’s wages are properly reported on the employer’s personal income tax returns.  A CPA can also assist with setting up regular payments to the state and federal tax authorities online.  Failure to pay taxes on a household employee may subject the employer to back taxes, penalties, and interest.  There is no limitation on how many years back the government can reach to collect unpaid employment taxes. 

Employers who do not pay taxes or collect withholdings on an employee’s wages are opening themselves to probes from tax authorities.  Household employers may also find themselves facing an injured or aged employee who can no longer provide the services required and who has no government benefits for future support.