Hiring Workers in Your Home: Legal Requirements

Need the help of a nanny, a housekeeper, or handyperson in your home? Before you hire anyone, learn about the practical and legal issues that you could face. In particular, you'll need to:

• determine whether the worker is legally classified as an employee or an independent contractor, and
• then follow the applicable IRS and other rules.

We'll also discuss the consequences of failing to comply with the law.

Who You Might Hire for Work in Your Home

After doing preliminary research about the qualifications you're looking for (a carpenter with fine woodworking skills or a nanny with a background in child development, for example), you'll probably have a few options:

Hire a company. Usually, if you hire a company to do the work, the company will send over qualified workers and be in charge of paying them. It will also pay employment taxes and have insurance coverage to protect you in case of worker injury or damage to your property. (Ask for proof of this insurance.) It's not uncommon to hire companies to clean your home or garden or to service your pool.

Hire a worker through an agency. If you want a skilled professional but don't know where to look or want one already individually vetted by a third party, you can hire through an agency. You could pay the agency directly, in which case the agency will probably be the actual employer and will cover insurance, handle employment taxes, and pay workers. (Confirm this with the agency first.)

Other agencies might charge you a fee to find you a qualified employee, but you will be the employer and handle these tasks. This is common when hiring a nanny, for example.

Hire an individual. If you want to screen and select your own service provider, pay and negotiate directly, and direct the person's work, your best bet is to hire an individual. As we'll explain below, you have more obligations as the employer if you elect this route.

Will Your Worker Be Considered an Employee or Independent Contractor?

If you decide to hire an individual (not a company or agency) to work in your home, the question arises as to whether the worker is considered your employee or an independent contractor. The answer will make a big difference in which tax laws and other rules you have to follow. Broadly speaking, you have more responsibility for an employee than you do for an independent contractor.

To complicate matters, there's no one definition of who qualifies as an "employee." Different government bodies have different definitions, which you'll have to familiarize yourself with in order to follow the appropriate laws. For example:

• The IRS and state tax agencies' definition of an employee determines whether you're required to pay and withhold taxes from your worker's paychecks.
• State and federal labor departments' definitions of who is an employee are key in determining whether your employees are entitled to certain protections, such as minimum wage and overtime provisions, to which independent contractors are not entitled.
• State unemployment insurance or workers' compensation boards' definitions of "employee" matter because, someday, the worker may file for unemployment or be injured on the job, and you'll need to have insurance to cover these situations.

The more control you exercise over the worker, the more likely it is that you'll be considered the "employer" by any of these agencies. If you hire the person to work certain hours, direct what the person does and how it's done, and the person works only for you, you're probably an employer. For example, a nanny you hire to watch your children each day will more than likely be considered your employee.

On the other hand, if the person offers services to the general public, furnishes the needed equipment or tools, and controls how and when work is done, the person is more likely an independent contractor. Gardeners or trained professionals like electricians are commonly independent contractors. (To learn more about who qualifies as an employee, read Employees vs. Independent Contractors.)

Your Tax Responsibilities to Workers in Your Home

If a worker is an independent contractor, your federal tax responsibilities are few. In fact, you don't even need to fill out the IRS form (1099-MISC) usually required when hiring independent contractors, because an exception excludes household workers.

But it's a different story if you are the worker's employer. Here are some of your responsibilities:

Get an employer identification number. For starters, you'll need to let the IRS know you're an employer and get an employer identification number (EIN), which you can do via the IRS website at www.irs.gov.

Check immigration documents. Also, you'll have to verify that the worker is legally authorized to work in the United States by having them fill out U.S. Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification and present documentary proof of eligibility to work. You won't have to submit the I-9 to anyone, but you will have to keep it on hand in case you're audited or investigated.

Pay taxes. If you pay a worker $2,700 per year or more in 2024 (the amount changes each year), you and the employee must each pay 6.2% of the employee's wages in Social Security taxes. You and the employee must also pay 1.45% each for Medicare taxes. In addition to your half, you're responsible for withholding the employee's share of these taxes. And you'll have to check with your state tax agency to find out its withholding requirements.

If you pay the employee $1,500 or more in any calendar quarter (any three-month period), you'll also have to pay federal unemployment (FUTA) taxes. The rate varies from state to state, but is usually 6% of the first $7,000 of annual wages paid to an employee.

Also, you'll have to file IRS Form W-2 at the end of the year. Some people choose to hire a payroll service to handle these tasks.

Your Insurance Responsibilities to Employees in Your Home in Case of Injury

What happens if the person you've hired is injured on the job? Usually, employers are responsible for paying for workplace injuries, and state law requires employers to have workers' compensation insurance to cover them. Whether you'll need it or not depends on the state you're in. Some states exclude domestic employees entirely, while others limit it to employees who work a certain amount or to employers of a minimum size.

If you're required to purchase workers' compensation insurance, you might be able to obtain the coverage through your homeowners' insurance policy. Though coverage for workers is generally excluded, you can potentially buy a rider or endorsement, depending in part on your state's laws.

Also, you'll probably have to pay for state unemployment insurance for your domestic worker. This provides income replacement and other work placement services to the worker if you end the employment relationship and the person is unemployed. The cost of this insurance varies by state.

Your Liability for Worker Injuries When a Licensed General Contractor or Subcontractor Is the Employer

One of the best reasons to hire contractors as an intermediary is that they're probably required by state law to provide workers' compensation insurance to employees. Virtually all employees of profit-making businesses, and most employees of nonprofit organizations are covered. These state-run programs are funded by employers, and provide medical coverage and other compensation to workers who are injured on the job, regardless of whether they or their employers' actions leading to the injury were negligent.

Some states provide limited exemptions allowing certain employers (such as sole proprietors) to opt out of the workers' comp system. In most states you can assume, however, that anyone working on your house is (if employed by a licensed general contractor or subcontractor) is covered by workers' compensation.

Paying Your in-Home Employees

If you hire a domestic employee, you will have to comply with state and federal laws regarding paying that employee. For example, you must pay the employee at least the minimum wage in your state. As a practical matter, you might have to pay much more than the minimum wage, because it can be hard to find someone willing to work for any less.

You might also have to pay overtime, though federal law doesn't require it for a household employee who lives in your home or for caregivers. (To learn more about the relevant rules, read Overtime Pay: Your Rights as an Employee.)

To learn more about the rules for hiring independent contractors, see Consultant & Independent Contractor Agreements, by Stephen Fishman, J.D..