Just about every middle-class and wealthy family in the US uses household help at some point. Babysitters, maids, gardeners, nannies…
American homes are full of them. And if your family uses any of these services, you face a minefield of legal hazards that almost no one wants to admit exists, much less discuss openly.
A recent lawsuit by entertainer Mariah Carey’s former nanny illustrates one of the issues that face families in this situation. But it’s by no means the only legal hazard with which you should be concerned.
In Mariah’s case, a dispute with a live-in nanny led to an ugly lawsuit. The nanny, whom Mariah fired after four months, wants to be paid back pay, including overtime, for tending to the entertainer’s 3-year-old twins. She is demanding that Mariah pay her more than $100,000, even though domestic employees aren’t covered by federal overtime pay requirements. (Some states, however, do require overtime pay for domestic employees.)
The risk to Mariah is mainly reputational; the working-class girl from Long Island who suddenly became a megastar seems to be taking unfair advantage of her household employees. But that’s hardly the only risk that household help poses to the American family.
To begin with, there are taxes to consider. Mariah Carey has full-time accountants on her staff to deal with this issue, but chances are you don’t. So you’ll need to take care of that yourself. And if you pay anyone more than $600 per year — babysitter, maid, whatever — who isn’t an employee, you need to file a Form 1099 with the IRS to report the person’s income. You can read a summary of the rules here. And, yes, you’ll need to get your help’s Social Security number (SSN) to file the 1099. If your help is in the US illegally, they can obtain anIndividual Taxpayer Identification Number (ITIN).
To rent or buy this 54 minute video with Costa Rica Attorney Roger Petersen please visit our Video On Demand page here.
If you’re like most Americans who hire household help and pay for their services in cash, your workers may not want you to file Form 1099. That’s understandable, but if you fail to do so — with or without the SSN or ITIN, — you can be fined up to $100. That’s not a lot, so lots of homeowners neglect to file it.
Next, you need to think about liability insurance. What happens if your help slips and falls and is injured on your property? Chances are your maid, babysitter, etc., doesn’t have their own coverage. Many home insurance policies omit coverage for injuries suffered by someone you hire to work in your home. Make sure your policy has this coverage, or purchase a rider for it. And by the way, if you don’t file Form 1099 for your household help or neglect other “paperwork,” your insurance might not cover injuries they suffer on your property.
What if you want to hire full-time live-in help, as Mariah Carey did? In that event, unless you hire the employee through an agency (think big fees), you have an even more imposing regulatory gauntlet to overcome.
First, you’ll need to get your prospective employee’s SSN or ITIN.
Next, contact the IRS and obtain an Employer Identification Number (EIN). You’ll need the EIN to pay taxes to the US Treasury that you deduct from your employee’s salary. In addition, as an employer, you must kick in half of the employee’s Social Security and Medicare contributions.
Have your household employee complete Form W-4 so you know how much tax to withhold from each paycheck. Also, you must inform your employee about various federal tax provisions such as the Earned Income Tax Credit.
Then you can enroll in the Electronic Federal Tax Payment System (EFTPS). This system lets you make federal tax payments electronically. Enrolling in EFTPS is an important precaution, because you can’t necessarily send the IRS a check for taxes you as an employer have withheld. An employer can actually be fined for sending a check directly to the IRS if it’s too large. (I know because it’s happened to me.)
Naturally, Big Brother wants to know if your household employee is in the US legally. So you also must give your prospective employee the Citizenship and Immigration Services (USCIS) Form I-9. If your housekeeper doesn’t speak English, you (or someone fluent in your employee’s language) will need to complete it. Keep a copy of the USCIS Handbook for Employers handy so you understand what forms of identification are acceptable.
If you’re tempted to skip this process, you should know that doing so is… well… illegal. You can be fined and imprisoned up to five years for “felony harboring” an illegal alien. But in most cases you’ll face only a civil penalty. Fines range from $250 for a first-time offender, up to $10,000.
Now that you’ve completed all the federal forms, you’ll need to register yourself as an “employer” at your state employment agency. You’ll apply for an unemployment insurance tax account number and then begin making quarterly or monthly payments to your state’s employment agency. Of course, there’s a form to submit with each payment. And as you’d expect, those failing to make the payments or to complete the form may be severely punished.
Also, once you register as an employer, in many states, auditors can make announced or unannounced visits at anytime to your home in order to make certain you’re complying with state unemployment rules. So can representatives of the federal Occupational Safety and Health Administration (OSHA) and state agencies with the same mandate in order to enforce workplace safety rules.
Are we having fun yet? I certainly hope so, because we still have a ways to go!
The next step is to register as an employer with your state revenue department. In some states, you can register as an employer for unemployment insurance purposes and for employer withholding tax purposes on a single form. But in most other states, you need to complete separate forms. Not surprisingly, once you register, you must file quarterly or monthly forms with the state tax department, along with whatever tax you calculate must be deducted. You’ll also need to file a year-end employer tax return. Once again, severe penalties apply for those tempted to ignore these requirements.
Don’t forget to check local licensing requirements. You may need to apply for an employer license. In some cases, you’ll discover that you won’t receive a license unless your home is zoned “commercial” and not “residential.” If that’s the case, you won’t be able to hire a household employee. Sorry!
We’re almost done! Just remember that by February 1 of each year, you need to give your employee IRS Form W-2 (typed or printed, not handwritten, please!). Don’t forget to mail IRS Form W-3 to the Social Security Administration by March 1. Penalties naturally apply for failing to meet these deadlines.
By now, you may just be tempted to start washing the dishes yourself or leaving Junior at home watching cartoons while you’re away. And if you stay in the US, that might be just what you have to do.
Fortunately, if you ever relocate to another country, you should find the going much easier. In Panama, for instance, hiring a household employee is much more straightforward. There are formalities, but they’re relatively easy to deal with, although if you don’t speak Spanish you’ll probably want to hire a lawyer to register your employee for social security, etc. And it’s highly unlikely that you’ll suffer the fate of Mariah Carey — lawsuits in Panama (and most other countries, for that matter) are much less common than in the US. And while the minimum wage in Panama varies depending on what part of the country you live in, rarely will you be required to pay a domestic employee more than $3 per hour.
Ease of hiring household help… just another reason to consider offshore!
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