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Paying Domestic Help Taxes and Benefits -- "Who Does This?"

By Diane Krausz, Esq.

The proper and correct payment of payroll taxes and related compensation benefits for domestic help, as required by the federal, state and city authorities has always been an area of low priority,even for the otherwise most law abiding citizens. The vast majority of those who employ domestic workers have, in the past, blatantly chosen to ignore the obligations to pay any benefits or taxes, especially if they are hiring only part-time help. Everyone is familiar with the candidate for a high federal appointment who was disqualified for failure to pay her nanny's taxes and workmen's compensation benefits. Even today, a popular retort from even the most otherwise honest citizen is: "So what? I'm not going to be nominated to an elected office anytime soon!"

Unfortunately, the failure to pay or pay attention to these legally required mandates can potentially cause the same well-meaning upstanding citizen thousands of dollars in liability costs and back taxes. For 2015, the lowest point of entry to be liable for such taxes and benefits was to pay a domestic worker at least $1,900 per year (approximately $36.50 per week or $158 per month). Recently, the Internal Revenue Service (IRS) has streamlined the payment of federal tax by combining the obligation to pay domestic workers with the employer's personal tax return in a Schedule "H." Therefore, unless otherwise required by the employee, the payment of federal taxes for domestic employees can be reported and paid annually on this form and at the same time as the taxpayer's own tax obligations. However, no state, including New York, has yet followed the IRS's lead, and all still require a separate quarterly filing of their taxes for domestic employees, as well as the payment of a workman's compensation policy (which is compulsory in New York). In the last 10 or more years, the risks of not doing so have started to outweigh the costs and burdens of doing so, since failure to comply has often resulted in hugely expensive and burdensome ramifications to an employer.

Here are a few cautionary stories:

Example 1- A man hired a caretaker "off the books" to facilitate care for his elderly mom and paid the caretaker in checks made out to "cash." The caretaker in turn "subcontracted" out some of her required care to third parties and paid them with part of the cash wages she received. The caretaker "fired" one of these third party subcontractors for negligence. This third party subcontractor in turn filed a wrongful termination suit against the man in New York State. The man now has a notice of failure to pay New York State taxes and workmen's compensation from the New York State Insurance Fund from 2012. Therefore, he is currently facing a penalty of non-payment of $72,000 per year for three years or a total of $216,000.

Example 2. In instances where a terminated domestic employee wants to claim unemployment benefits from an employer where the employer has NEVER filed quarterly returns to the State, the State first sent the employer letters requiring compliance ASAP. After that, where the employer does not comply, the State assessed a failure to file penalty, which in New York is $1,000 per quarter.

Example 3. A nanny agreed to be paid "off the books" in cash by a family. A month later, when playing with her charges, the nanny slipped, fell on her back and was severely injured. The injury required at least three weeks of bed rest and physical therapy. Since she was not covered by workmen's compensation, she expected the family to pay all hospital and other medical costs, as well as her full salary during her recovery. She further asked that the family an (illegal) liability claim on its homeowner's insurance policy. This is costing the family thousands of dollars, which it is paying in lieu of a lawsuit that was threatened by the nanny.

In the past, employers have attempted some "compromises" in lieu of paying and filing all of the requisite taxes and benefits for a domestic worker, such as:

A) Paying the domestic employee as an independent contractor. The IRS clearly states that this treatment and definition is incorrect if the employee works under the control and direction of the employer;
B) paying the employee only partially as an employee with the remainder "off the books." In the case of a subsequent injury, or termination that is reported by the employee to the state or federal government, the failure to pay partial salary may be seen as a full, not partial violation; and
C) deducting the domestic employee as a salaried employee on a related company of employer.

Apart from the validity of taking the domestic employee as a legitimate business deduction for taxes, the payment of workmen's compensation for the domestic employee as an employee of another company will be inappropriate and incorrect coverage for the domestic employee, whose place and type of work will also most likely be misrepresented and not properly covered.

A more efficient solution is to hire an outside service that specializes in the processing of domestic payroll and its related issues. Using a competent payroll service can be a cost efficient way to stay current with the federal, state and local employment regulations and tax laws, and prevent claims of non-payment of proper taxes and insurance coverage.

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This page contains a single entry from the blog posted on January 5, 2015 5:06 PM.

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