HIRING A CAREGIVER FOR IN-HOME HELP CAN BE TRICKY
How to avoid making yourself an employer subject to taxation.
Do you provide financial support to a family member? If so, you’re among 32% of adults ages 40-64 who do so – and 42% expect to be doing so in the future, according to a 2020 AARP survey.1
If you pay a caregiver for in-home help for your parents – even casually – you might be an accidental employer, which makes you responsible for paying the so-called “nanny tax.”
An independent caregiver (also called a private caregiver) is your household employee if you or another family member gives that person instructions on how to care for your loved one and if you supply the necessary tools and equipment.
Exceptions to this include your spouse, parent, child under age 21 or a nonfamily worker under the age of 18. None of these are considered an employee.
Hiring a caregiver for in-home help can be a paperwork-intensive process. It means calculating and keeping detailed accounts of the employee’s wages and taxes, federal and state income tax withheld, Social Security tax withheld or paid for the employee and Medicare tax withheld or paid for the employee.
Clearly, you’d need the help of a tax professional.
IRS Publication 926 (Household Employer’s Tax Guide 2021) offers more in-depth information about filing taxes as an employer. Unless you enjoy the paperwork, you don’t want to be an employer. And you don’t have to.
Here are two simple ways to get around it:
- You avoid the nanny tax if you hire a caregiver for in-home help who is self-employed – defined by the IRS as someone who controls how the work is done, provides his or her own tools and offers services to the general public as an independent businessperson or contractor.
- You could also hire a caregiver through a licensed home care company. In that case, the company will take care of all tax obligations, workers’ compensation insurance and payroll issues, leaving you with a simple rate to pay for services.
Before selecting a company, first determine the level of care you’ll need and whether any medical assistance is involved. Interview several companies before making your choice. It will take some legwork to determine whether a company is a good match for your needs.
To do that:
- Find out who owns the company and how long it has provided care in your area.
- Verify that the company is licensed, bonded and insured.
- Request a copy of its insurance declarations page as proof that it is properly insured.
- Find out what in-house training is provided to caregivers and what ongoing training is required to keep their skills sharp.
- Learn how the company vets the people it hires, including whether it runs a nationwide criminal search, drug screening and credit check. How often are drug screenings and criminal searches repeated?
Finally, be prepared to honestly answer questions about your loved one’s health conditions so that the company can determine which of its services will best help maintain your loved one’s quality of life. The majority of older adults prefer to stay in their homes as they age, and finding the right caregiver for in-home help will help provide everyone peace of mind.
1 Skufca, L. (2020, January). Midlife Adults Are Supporting Parents and Adult Children. AARP. Retrieved October 20, 2021, from https://www.aarp.org/research/topics/economics/info-2020/midlife-adults-providing-financial-support-to-family-members.html
This is a hypothetical illustration meant to demonstrate the principle of compound interest and is not representative of past or future returns of any specific investment vehicle. They do not include consideration of the investment fees or expenses, time value of money, inflation, fluctuations in principal or taxes.
Neither Edelman Financial Engines, a division of Financial Engines Advisors L.L.C., nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from qualified tax and/or legal experts regarding the best options for your particular circumstances.