If you have chosen to employ a caregiver who is not affiliated with a home care agency, it means that you have hired a self-employed, independent, or private caregiver.
Without affiliation to a company, the employer of the independent caregiver may be you; the person who hired them. This means you’re now expected to perform duties like payroll management, filing taxes, and workers’ insurance.
In order to determine which taxes you may be responsible for, you need to determine which type of caregiver you have hired.
In this article, we will discuss the types of caregivers for older adults, the fundamentals of tax payment for self-employed caregivers, and provide a comprehensive guide on how to pay taxes as a household employer.
- Household Employee vs Independent Contractor Caregiver
- Why Do Self-employed Caregivers and Those Hiring Them Need To Pay Employment Taxes?
- Why Should Self-employed Caregivers and Employers Pay Taxes Instead of Cash Wages?
- What Self-Employment Taxes Should Be Paid?
- When Should Self-employed Caregivers and Employers Pay Taxes?
- Alternatives to Processing Payroll and Payroll Taxes Yourself
Household Employee vs Independent Contractor Caregiver
To determine whether a caregiver is an employee or an independent contractor, consider the level of control and independence in your working relationship.
If the caregiver follows specific instructions on how, when, and where to provide care, and you (the employer) control the work environment, the caregiver is likely your employee.
If the caregiver operates independently, determines their own work schedule, and brings their tools and supplies, they are more likely an independent contractor.
Types of Caregivers
Let’s run through a few scenarios to determine which type of caregiver you are working with.
- Scenario 1: You list a detailed job description in the newspaper or online looking for a caregiver to work 5 days per week from 8-4. You are offering to pay $20 per hour for the caregiver’s compensation. The responsibilities for your “job” are companionship, housekeeping, help with shopping, and occasional personal care assistance for your loved one. In this scenario, the caregiver would be considered a household employee, even though they are an independent caregiver who isn’t employed by a home-care agency. These caregivers may still consider themselves self-employed caregivers. You will need to apply for an employer identification number and issue wage and tax statements.
- Scenario 2: You see an ad for a private caregiver who is looking for additional clients. The caregiver tells you they have availability two days per week for 5 hours each day. They provide caregiving services for several different clients and set their own schedules, hours, and rates. In this case, the caregiver would be considered an independent contractor.
- Scenario 3: You contact an in-home care agency and are matched with a caregiver to care for your loved one. You are billed by the home care company on a weekly or monthly basis. The caregiver is an employee and will have an employment contract with the agency. It is not your responsibility to withhold taxes, and the caregiver does not pay self employment tax.
Why Do Self-employed Caregivers and Those Hiring Them Need To Pay Employment Taxes?
When you hire a caregiver via a home care agency, the caregiver is an employee of the agency which is then responsible for managing payments and taxes.
But when you hire a self-employed caregiver, under federal law, you become their employer and they’re generally considered a household employee even if there’s a self-employed caregiver contract involved.
As an employer and employee, you’re both responsible for calculating taxes and paying them.
Why Should Self-employed Caregivers and Employers Pay Taxes Instead of Cash Wages?
Paying a self-employed caregiver off the books might appear to be more cost-effective and straightforward. However, adhering to the regulations established by the internal revenue service (IRS) and maintaining accurate records of caregiver payments offer numerous advantages that outweigh the added complexity.
The individual or the family member employing the caregiver can avoid potential conflicts with the IRS. The most significant risk associated with under-the-table payments is that the IRS may view them as tax evasion, leading to penalties for the employer and employee if discovered.
Legally compensating a caregiver places the employer in a favorable position when applying for any type of public assistance, like Medicaid, as there will be a clear paper trail. It can also bolster the employer’s eligibility for valuable tax deductions, including medical and dependent tax credits.
By making legitimate payments, the caregiver is granted access to disability insurance in case of injury. This coverage safeguards the employer from potential legal action, offering peace of mind in the event of unexpected occurrences.
What Self-Employment Taxes Should Be Paid?
Since they don’t have an employer taking out taxes, what taxes are self-employed caregivers supposed to pay?
Also, what employment taxes are the person or household hiring supposed to pay as an employer?
The answers to these questions are Medicare Tax, Social Security Tax, Federal Income Tax, Federal Unemployment Tax, State Unemployment Tax, and State Income Tax.
Before explaining the details of these taxes, consider the pay period. The time between the starting and ending dates for payroll is called the pay period, and it is generally weekly, every other week, or monthly.
The payday is the date on which the payment to the caregiver is made. The employee and employer need to disclose each amount given on a payday to state and federal agencies.
Self-employed taxes are required to be paid by the employee, the employer, or both as follows:
This tax is paid by the employer and the employee.
Medicare Tax is a total of 2.9 percent on the year’s employee earnings, divided equally so that the employee pays 1.45 percent and the employer pays 1.45 percent.
Keep in mind that for 2023 taxes, the employer and the employee are only required to pay Medicare Tax if the total wages paid for the year are more than $2,600.
Also, if the caregiver/employee’s total wage amount per year is more than $200,000, the employee is required to pay an extra 0.9 percent on their earnings beyond the basic percentage.
Social Security Taxes
Social Security taxes are paid by both the employer and the employee.
Social Security tax is a total of 12.4 percent on the year’s employee earnings, divided equally so that the employee pays 6.2 percent and the employer pays 6.2 percent.
For 2023 taxes and similar to Medicare Tax, the employer and the employee are only required to pay Social Security Tax if the total wages paid for the year are more than $2,600.
Note that if the caregiver/employee’s total wage amount per year is more than $147,000, they’re only taxed on earnings up to $147,000.
Federal Income Tax
This tax is paid by the employee only.
As an employer, you’re not required to withhold federal income tax beyond the amount corresponding to the Federal Income Tax from the caregiver/employee’s paycheck. However, you may do so if the employee asks for the federal income tax to be withheld.
In this case, the employer must have the employee fill out an Employee Withholding Certificate (Form W-4) that the employer can include in their tax records.
If the employer withholds Federal Income Tax from the caregiver’s paycheck, the employer is accountable for providing documentation with the correct amount on tax day.
If the employer doesn’t withhold the Federal Income Tax due from the caregiver’s paycheck, the caregiver still must pay the tax as a household employee.
Federal Unemployment Tax Act (FUTA)
This tax is paid only by the employer. It exists so wages can still be paid to employees who lose their jobs.
That said, the FUTA tax is only required if the employer pays their employee(s) more than $1,000 per calendar quarter of each tax year. Also, the employee is only taxed on total wage amounts of up to $7,000.
FUTA is calculated as 6 percent of the year’s employee earnings.
State Income Tax
This tax is paid by the employee only. It’s not a requirement in every state and the exact percentage varies from one state to another. Check with your state revenue department for the most up-to-date information about your state income tax.
State Unemployment Tax
This tax is paid only by the employer. It’s not a requirement in every state and the exact percentage varies from one state to another.
You should contact the unemployment tax agency in your state to find out whether or not employers are required to pay this tax.
When Should Self-employed Caregivers and Employers Pay Taxes?
After calculating your taxes as an employer or an independent caregiver/employee, there’s the matter of actually paying them. You need to know when to pay the taxes and which organization should receive the money.
Generally speaking, you’re required to pay state taxes every quarter of the tax year and pay federal taxes at least once per year. You can choose to pay taxes either by paper or electronically.
For 2022 self-employed taxes, employers and employees are required to complete the payment process by the 18th of April 2023.
Alternatives to Processing Payroll and Payroll Taxes Yourself
If you are overwhelmed by the responsibilities of payroll processing and tax preparation, consider the following options:
- Hire a professional: Engage the services of a certified public accountant (CPA) or tax professional who specializes in household employee taxes. They can help manage payroll, file necessary forms, and ensure compliance with tax laws.
- Use payroll software: Many payroll software options are specifically designed for household employers. These tools can simplify the process of calculating wages, deductions, and taxes, as well as generate required forms and reports.
- Consult a payroll service: A payroll service can manage all aspects of payroll and tax preparation for household employees. They will handle calculations, deductions, tax payments, and form submissions, saving time and reducing the risk of errors.
- Seek educational resources: The IRS and various state agencies offer guides and resources to help household employers understand their tax obligations. Online articles, webinars, and workshops can provide valuable information and insights.
- Join a support group or forum: Connecting with others in similar situations can be a helpful way to share experiences, ask questions, and find guidance. Online forums or local community groups can offer support and advice on managing household employee taxes.
By exploring these options, family caregivers can alleviate the burden of payroll processing and tax preparation, ensuring compliance with regulations and freeing up time for other responsibilities.
It is essential to pay taxes when hiring a household employee to comply with IRS regulations, avoid potential legal problems, and benefit from tax deductions.
Paying caregivers under the table may lead to IRS penalties, loss of Medicaid eligibility, and inability to claim tax deductions. Employers should ensure they pay Medicare taxes, Social Security tax, federal income tax and state income tax, and unemployment taxes for their household employees.
It is the joint responsibility of the employer to pay minimum wage and the caregiver/employee to pay the necessary self-employed caregiver taxes in order to ensure that the payroll follows the tax law.
Why paying caregivers under the table is not advisable:
- Risk of IRS penalties due to tax evasion
- Loss of Medicaid eligibility benefits
- Inability to claim tax deductions
Taxes that need to be paid:
- Employment taxes (Social Security and Medicare)
- Federal and state income taxes
- Unemployment taxes (FUTA and SUTA)
State Income Tax and/or State Unemployment Tax is only applicable in certain states.
Frequently Asked Questions
Caregivers may receive a 1099 form if they are classified as self-employed, independent contractors. However, if they are considered household employees, they should receive a W-2 form from their employer instead, detailing their wages and taxes withheld during the year.
To determine if a caregiver is an employee or an independent contractor, evaluate the level of control and independence in the relationship. If the caregiver follows specific instructions and the employer controls the work environment, they are likely an employee. If the caregiver operates independently and sets their work schedule, they may be an independent contractor.
If you are overwhelmed by the process of paying taxes and handling payroll for a household employee, consider hiring a certified public accountant (CPA), a tax professional, or using a payroll service. These experts can manage payroll, file taxes, and ensure compliance with relevant laws in your state.
The potential consequences of not properly reporting caregiver wages and taxes include IRS penalties for tax evasion, back taxes, and interest on unpaid taxes. Failure to accurately report wages may negatively impact your eligibility for government benefits and result in the loss of potential tax deductions or credits.
Amie Clark, BSW
Aging Advocate and Senior Care Expert
Amie has worked with older adults and their families for the past twenty-plus years of her career. Her senior care knowledge is based on her experience as a social worker, family caregiver, and senior care consultant. Learn more about Amie here.