What if you loved one does not want to go to a nursing home? In order to stay at home and avoid a nursing home, the client may have to hire a Home Health Caregiver. When considering Home Health Caregiver Hiring and Taxes there are three options to take into account.
1. Hire a Home Health Company
For the best tax and legal coverage hire home health company to provide a caregiver. By hiring a home health company you will pay a fee and the company is responsible for the caregiver’s payroll taxes, workers compensation and other benefits.
There are two potential drawbacks of this choice. First, this choice will be more expensive than hiring an individual caregiver however you must take into account the issue of payroll taxes and workers compensation. Second, with a home health company you may lose the initiative to choose a specific caregiver that would best meet your needs.
Essentially you are at the mercy of the home health company assigning you a caregiver.
2. Hire a Household Employee
If you hire an individual to provide home health care, you must determine if the individual should be treated as an employee or independent contractor for tax purposes. Under most circumstances, a caretaker would be an employee of an elderly or disabled person because they have the right to tell the caregiver what must be done. If this is the case then the elderly or disabled person will have to report the earnings of the caregiver on Form W-2.
Treating a caregiver as a household employee is the safest treatment under IRS guidelines as independent contractors are highly scrutinized. If you choose this method please consult a CPA firm or reference IRS Publication 926, Household Employer’s Tax Guide. You will be responsible for withholding social security and Medicare taxes if you pay a caregiver wages over $1,900 for 2015.
Also for 2015, Social Security taxes are withheld at a rate of 6.2 percent up to a wage base limit of $118,500 and Medicare taxes are withheld at a rate of 1.45 percent with no wage limit. According to the IRS, you have no obligation to withhold federal income taxes. The caregiver should complete Form W-4, Employee’s Withholding Allowance Certificate.
In addition, you will be responsible for federal unemployment at a rate of 6 percent on wages up to $7,000 per year. State unemployment taxes may also apply. Workers compensation coverage will also be required as homeowners insurance alone will not cover a potential injury.
Finally, you will have to issue a W-2 to the caregiver after the end of the year by January 31 and submit to the IRS by February 28. The payroll taxes for the caregiver are reported on Schedule H with the 1040 income tax return.
3. Hire an Independent Contractor Caregiver
If you choose to hire a caregiver as an independent contractor there are very specific guidelines that must be met. According to the IRS, facts that provide evidence of the degree of control and independence fall into three categories:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
The Family or Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor.
There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another. One additional aspect to consider is if the elderly or disabled person is not able to communicate and direct the actions of the caregiver.
The caregiver should complete Form W-9, Request for Taxpayer Identification Number and Certification. The W-9 will give you the required information that will need to be reported to the IRS and the employee on Form 1099 after the end of the year by January 31. Ensure that your caregiver meets the independent contractor definition above to avoid be held liable for employment taxes for that worker by the IRS. This seems to be a hot topic for the IRS in recent years so make sure you have your case together if you choose to treat the Caregiver as an independent contractor.
In addition, you should obtain domestic household workers compensation insurance coverage as homeowners insurance alone will not cover a potential injury.
As always, each situation is different so I encourage you to consult your local attorney or CPA firm to ensure that you are taking care of your loved one while meeting the tax and legal obligations surrounding home health caregivers.