By Tom Breedlove
There is a fairly common misperception that families can classify a domestic worker as an independent contractor if they want to. Thanks to misinformation floating around on the Internet -- and sometimes even bad advice from a general tax professional -- some families are misled into thinking they can "just give her a 1099." (Form 1099 is the form business use to report wages paid to an independent contractor).
The IRS has ruled definitively that nannies and most other domestic workers should be classified as employees. Misclassifying them as independent contractors is considered tax evasion and offenders are saddled with back taxes, penalties, and interest. If caught, it is an extremely expensive mistake for families. Being classified as an independent contractor is not only illegal, it's financially bad for the nanny. That's because independent contractors are required by law to pay for both halves of the FICA taxes (social security and medicare).
In 2011, the employee portion of FICA is 5.65% of gross wages (it's normally 7.65%, but there is a temporary deduction to help stimulate the economy). The employer portion of FICA is 7.65%. Having to pay the additional employer FICA tax burden can break the bank for many nannies. (For someone earning $30,000 per year, being misclassified as an independent contractor would cost her $2,295 per year in additional taxes).
If you're a nanny making more than $1,700 in the 2011 calendar year from a particular family, the family should provide you with a Form W-2. If they give you a Form 1099, you're being misclassified -- and it's costing you money. Don't let yourself get "1099-ed!" Make sure the family understands the risk they're taking -- and the additional tax burden being placed on you.
Tom Breedlove is a Partner at Breedlove & Associates, the nation's leading specialist in payroll, tax, and HR services for household employers.