Household Workers - 1099s acceptable?

[Hoosier]

Got an elderly client who in 2012 paid four different individuals a total of $25k to look after her. I guess this could be considered babysitting and would be an example of household employees. Since I just found out about the workers and the payments for 2012 it appears to be too late to deal with this as a household employee situation. Thus, it seems the best approach is for the client to issue 1099s to each worker that helped babysit for her for 2012. Any thoughts, suggestions, advice, danger areas, repercussions, etc.? Also, I'm guessing that if this situation continues into 2013 the client should set-up a household employee realtionship regarding taxes, reporting Schedule H for 2013, etc. Thanks.

[Burke]

I have a client (employing a housekeeper) who never gives me her stuff until the end of Feb every year. We do the W-2, then when I file the return I include the Sche H. She pays the employee's part of SS for them, so I have to add that to the next year's W2 every year. It's not too late to handle it correctly.

[FEDUKE404]

Quick fix needed

At the dollar levels you cite, the client could be in deep whatever by going the Form-1099 MISC under the circumstances as described.

The likely best she can do is come up with a W2 for each employee and then file a Schedule H on her own tax return.

A greater problem is the lack of (apparently) her paying any required FUI/SUI on a timely basis. That could be expensive. (Look at Part II of Schedule H !!) As for the four employees, they might get a real surprise on their own taxes re SE tax, unless of course they're "not in business."

FWIW: I have knowledge of a person (not a client) who was in a similar scenario for a household employee. I'm not sure "how" she was paid, but when the worker went to file for unemployment (death of employer person) all heck broke loose. When the dust had settled, the employer's estate had to pay in a huge amount of back taxes and punitive double damages on all unpaid, retroactively calculated amounts. I assume a similar scenario would also likely occur if, in your case, any of the four individuals got "injured on the job" and went looking for workmen's comp!

Curious: With the amount of funds involved here (and in past years?) how could this client be so clueless??

FE

[Hoosier]

The amounts were paid to four individuals - around $6,000 each over the course of the year for a total of around $25,000 or so. It appears that to properly report this activity as household workers that the client will need to secure a Federal Tax ID number, issue W2s and sign up as an employer for state unemployment. Looks like payroll taxes will need to be paid as well. The client is in her 80s and this will be a painful conversation attempting to explain. Also, according to the tax book, the client should have obtained the EIN by January 31. Blindsided by an aging client...

[FEDUKE404]

Dealing with the problem

The amounts were paid to four individuals - around $6,000 each over the course of the year for a total of around $25,000 or so. It appears that to properly report this activity as household workers that the client will need to secure a Federal Tax ID number, issue W2s and sign up as an employer for state unemployment. Looks like payroll taxes will need to be paid as well. The client is in her 80s and this will be a painful conversation attempting to explain. Also, according to the tax book, the client should have obtained the EIN by January 31. Blindsided by an aging client...

That's pretty well what I would expect. If this is the "first year" you may get some consideration due to the client's age and lack of awareness of the rules. Getting the EIN could be a big hurdle. The unemployment paperwork (federal/state) could also be challenging "after the fact."

You also might suggest the four employees defer on filing their own tax returns (think Form 4868 if necessary) until things are more resolved.

FE

[Bees Knees]

The amounts were paid to four individuals - around $6,000 each over the course of the year for a total of around $25,000 or so. It appears that to properly report this activity as household workers that the client will need to secure a Federal Tax ID number, issue W2s and sign up as an employer for state unemployment. Looks like payroll taxes will need to be paid as well. The client is in her 80s and this will be a painful conversation attempting to explain. Also, according to the tax book, the client should have obtained the EIN by January 31. Blindsided by an aging client...

I would explain the rules (do not give her the option of a 1099 because that is clearly the wrong option) and then suggest she hire help through an agency. The agency issues the W-2 and withholds and pays payroll taxes, and the taxpayer merely pays the agency a fee for their services.

The thing to remember is tax law is not about what is simple. How many employers would prefer to issue 1099s and not bother with Form 941, 940, state unemployment, etc.? The IRS puts household employment taxes on the 1040 for a reason. They need somebody like us who will inform the public about these complex rules, because they know the public would not otherwise comply with the rules. We are under obligation to inform our clients because if the 1040 is wrong (leaving Schedule H off), the IRS can penalize us for not preparing a correct return. That is the reason household employees were moved off the 941 and onto the Schedule H a few years back. The fact the client is in her 80s and not really in the mood to hire employees and get an EIN is irrelevant.

[Burke]

The amounts were paid to four individuals - around $6,000 each over the course of the year for a total of around $25,000 or so. It appears that to properly report this activity as household workers that the client will need to secure a Federal Tax ID number, issue W2s and sign up as an employer for state unemployment. Looks like payroll taxes will need to be paid as well. The client is in her 80s and this will be a painful conversation attempting to explain. Also, according to the tax book, the client should have obtained the EIN by January 31. Blindsided by an aging client...

It's not that difficult. You can obtain an EIN online in seconds. Each employee needs a W-2. No problem, your software can provide. They might be late to the employees but the deadline for SSA is 2/28/13. She/you can advise them of this because someone will have to contact them anyway for SSN's. Get W-4's signed. File Sche H with the TP's return by the deadlines. She may have to pay the employee's portion of SS/MC taxes this year, but she can withhold their portion for 2013 from each pay period. It would be a flat percentage, so it is easy to figure. Perhaps you could do this for her -- new business. SUTA requirements will vary by state, but she pays that, not them. Now, do all these payments qualify for a medical deduction? Does she meet the ADL requirements etc, and can they be considered assisted living expenses? Sounds like they might, based on the circumstances. This would be a nice deduction for her.

[Gary2]

While the previous comments are correct, do take a look at Pub. 926, under the general heading "Do You Have a Household Employee", and specifically the section "Workers who are not your employees." They give an easy example of a lawn service, which provides their own equipment, etc. You haven't given specifics, but if the caretakers are providing similar services to other clients in the same time frame, using their own vehicle to transport the elderly client or go shopping for the client, and so on, it gets more interesting. You'd need to go through the employee vs. contractor checklist, maybe even search for tax court cases, etc. I wouldn't want to take an aggressive position on this, but at least ask enough questions to see if there are facts that might put it firmly in the independent contractor side. If "look after" and "babysitting" are indeed accurate descriptions, then this won't fly.

[JohnH]

And even if the employee W-2 forms are given/sent to them after Jan 31, there's no penalty.
So the risk in classifying them as household employees is very low.
About the only issue is late-filed unemployment tax reports.

[taxea]

The real question is: do they qualify under IRS independent contractor rules? If not, they are employees and W-2s are required.