Paying caregivers under the table may happen especially if the family and care recipient have decided the latter will remain at home during care. If a loved one is being cared for at home, are there any risks and consequences of paying nannies off the books? What are the IRS rules for caregivers working for care recipients at home?
While some families find it easier to hire caregivers using legal means, others are tempted to take the “off the books” option with no formal employment agreements. Even though it may seem convenient, it comes with various risks and penalties that caregivers and families should know before starting the care.
Understanding “Under the Table” Payments
“Under the table” payment of caregivers typically means not formalizing the arrangement. In such a scenario, the family regards the caregiver as a contractor instead of an employee. That means no withholding or reporting of taxes to the IRS. While it may seem more convenient because of its simplicity and the cost savings involved, it can give rise to serious financial and legal consequences.
Do caregivers qualify as household employees?
Some families may argue that a caregiver is not a household employee and therefore doesn’t need a formal employment agreement. Well, that’s not how the IRS views it as there are conditions as to who is a household worker.
A person is only regarded as a household employee if their employer defines every activity to be performed and how they’re done. Self-employed people regard themselves as independent contractors since they decide how they provide their services. Also, they come with their supplies and equipment to perform their duties.
In the case of a private caregiver, most are usually not independent contractors because they don’t provide supplies and equipment. Also, they’re often told what to do. That qualifies them as household employees and families should pay taxes on caregiver wages.
The only time when a caregiver is not a household employee is if they’re the care recipient’s spouse, parent, child under 21 years, or non-family member below 18 years. Family members above 21 years can offer caregiving services and no employment taxes will be owed to the government. However, the IRS still demands that any compensation to the caregiver is reported via Wage and Tax Statement (W-2 Form).
In certain cases, a family caregiver is not classified as a household employee. However, they must report any compensation provided as income on Form 1040. In that case, they are required to settle their self-employment tax dues.
Why do families resort to paying caregivers under the table?
Some families may prefer paying caregivers under the table for various reasons, even though the practice is illegal and attracts risks and penalties. Here are commonly known reasons why some families take an “off the books” approach:
The most obvious reason is often to reduce the costs of taking care of a care recipient. Some families may find private caregivers’ hourly rates a bit expensive and that’s why they resort to “under-the-table” arrangements. That way, they can escape extra costs like workers’ compensation insurance, unemployment insurance, and payroll taxes.
Most people find informal arrangements easier to manage without factoring in any legal implications. Administrative responsibilities that come with formal employment like reporting and withholding taxes can be overwhelming.
Having household employees means registering as an employer, which demands registration with the IRS and payroll management. These activities can be time-consuming and bureaucratic for families, making them opt for “off-the-books” arrangements.
Lack of knowledge
At times, paying caregivers under the table happens due to a lack of knowledge of the legalities involved. Families may opt for the path with the least friction without understanding the risks involved.
Informal arrangements and cultural norms
In situations where caregivers are family members or close relatives, the caregiving act is viewed as a favor and not as employment. In such a situation, they may not seek formal employment arrangements.
The Risks and Consequences
It’s worth noting that while paying nanny under the table may seem convenient, it can cause legal and financial consequences for the family and the caregiver. The following are the risks and consequences that can arise from paying caregivers under the table:
Failure to formalize the arrangements with a private caregiver poses legal consequences for the parties involved:
Any unreported caregiver compensations can be regarded as tax evasion, which can attract criminal and civil penalties such as fines. Both the employer and the caregiver may be fined for evading state and federal taxes. This can in turn attract back taxation and other accrued interests on owed taxes.
In more serious cases, they may also be incarcerated while the IRS penalties can accrue to fines worth thousands of dollars.
In situations where a private caregiver is treated as an independent contractor rather than a household employee, labor law violations may occur. This also can cause legal disputes which may result in costly financial penalties.
Loss of benefits and protection
Household employees are entitled to certain benefits and protections. If a private caregiver isn’t treated as such, it can lead to loss of:
When a caregiver loses their job as a household employee, they may receive unemployment benefits. That is contrary to independent contractors who don’t have such a financial safety net.
Social Security and Medicaid
Caregivers are entitled to withholding taxes such as social security and Medicaid which can earn them access to the programs and work credit in the long run. If they don’t work as employees, they lose such benefits.
When evaluating a person’s eligibility, Medicaid often takes a look at their income for the past five years. If the caregiver gets payment without reporting taxes, it may be regarded as a gift and that can affect eligibility to receive Medicaid.
When private caregivers get paid off the records, it denies them coverage by insurance should an accident occur while working. Liability insurance and workers’ compensation may not provide coverage for incidents occurring during informal work.
Impact on future employment
Since no official documentation of the caregiver’s employment exists, it can be difficult to secure formal employment later in the future.
What To Do When Hiring a Private Caregiver
Paying caregivers under the table may seem convenient, but the repercussions can be costlier if the IRS discovers it. The tax authority will demand tax dues if a private caregiver receives over $2,400 annually. In such a case, the care recipient’s family should assume the role of an employer which includes payroll management and filing taxes.
Before involving a caregiver, families ought to find out what care level the recipient requires and come up with a comprehensive job description. This should include the number of hours of work, private caregivers’ hourly rates, and the days worked during the week. In certain situations where special skills are needed, the family should cater for the expenses of training the private caregiver.
To pay a caregiver legally, families should consider using the local market rates, guided by federal law. The rates may vary according to state, but it should be between $10 and $20 an hour. According to the Fair Labor Standards Act (FSLA), any caregiver who works more than 40 hours a week is eligible for overtime payment. This should also meet the minimum wage requirements as set by the federal law.
Besides the legal requirements, the care recipient’s family needs to carry out a background check on the caregiver. After this, a formal employment agreement should be drafted, including the starting date, payment rates, benefits, and roles.
Other requirements as a new employer include:
- Applying for Employer Identification Number (EIN).
- Registration with the state’s tax department.
- Seeking Workers’ Compensation Insurance.
- File an Employment Eligibility Verification (Form I-9)
- Fill out the Employee’s Withholding Allowance Certificate (Form W-4) from the IRS.
- Inform the state about the new employee.
If all these processes seem a bit daunting, families of the care recipient may consider using certified accountant or financial advisor services. It may add to the cost of formalizing the process, but it will ease the burden of having to redo it again if not properly done.
It’s highly advisable to pursue formal employment to avoid the risks involving paying caregivers under the table. It will not only save you the headache of legal implications but will also help the caregiver in the long run.
Paying taxes isn’t everyone’s cup of tea. It’s not surprising to see everyone including dollar billionaires looking for ways to avoid taxes. While it may seem convenient in the short term, the ramifications of tax evasion can be dire. Most families of elderly people who need caregiving may not be able to afford the penalties and fines related to tax evasion. That is why paying caregivers under the table is highly discouraged.
Understandably, the bureaucracy involved with formalizing the process can be dreary, but with proper guidance from a professional, it shouldn’t be difficult.