San Francisco Examiner: Business Section, Tuesday February 28, 1995

By: ROBERT L. SOMMERS - TAX MAN


'94 Began New Ways To Pay Taxes On Household Help

One big question: Employee, or Contractor?

DESPITE ALL the hoopla about "Nannygate," most people still don't know if what they're doing is legal.

But Zoe Baird's shame was not in vain. In reaction to the controversy, and to the revelation that members of the Clinton administration had failed to pay taxes on their household help, Congress changed the law.

Since Jan. 1, 1994, taxpayers have not been required to withhold Social Security and Medicare taxes on payments to workers who make $1,000 or less per year.

And since the beginning of this year, individuals no longer have to pay taxes on wages paid to baby sitters or householder workers under age 18, unless their full-time occupation is household employment -- even if their wages exceed $1000 annually.

They also no longer have to file the dreaded Form 942 on a quarterly basis to report taxes on household employees. All wages paid in 1995 should be reported on next year's personal income tax return, Form 1040.

But if all this is news to you, you may have to file four 942 forms for last year. It all depends on whether the worker(s) you hired last year were "independent contractors" or "employees."

Take the following example: A friend recommends a couple she knows to do your house cleaning. The couple agrees to clean your house once a week for $35 per cleaning for a year. Working together, it takes about two hours for the couple to clean your house; if only one of them works, it might take four hours.

The two people clean other households and are legally permitted to work in the United States. Sometimes, if one of them is unavailable, another person fills in. They are paid only when they work and you provide the cleaning materials but do not instruct them on how to clean the house.

In the example, at $35 per week, you pay less than $1,000 per worker per year, therefore payments should fall within the $1,000 exemption per person.

It does not matter if the payments are made in cash or by check, or made entirely to one house cleaner, who in turn pays other assistants.

If the price per cleaning is $45 per week instead of $35, over $1,000 annually per worker, then the issue becomes whether the workers are independent contractors or employees.

Under the traditional common-law test, determining whether a worker is an independent contractor or an employee is judged on a case-by-case basis, and involves the issue of worker control: Are services of a household worker subject to the taxpayer's will and control over what must be done and how it must be done? The IRS has developed 20 factors to conclude whether a worker is an independent contractor.

In the example, the two house cleaners are independent contractors for these reasons: you, the hirer, do not control how the workers do their job; the workers are part-time; they work for other customers; they can work either as a team or individually (or use assistants); they are paid for producing results (a clean house); and they are not trained by you.

In addition, if you consistently treat your household help as independent contractors, and have "any reasonable basis" (defined as a reasonable and good faith belief) for this treatment, the IRS is barred from reclassifying these workers as employees under an obscure federal statute, Section 530 of the Revenue Act of 1978, that has been curiously omitted from the tax code.

For household workers, the relevant part of Section 530 states that the "any reasonable basis" standard may be satisfied by meeting either one of the following statutory "safe havens":

Actually, a taxpayer may demonstrate other reasonable ways of treating someone as an independent contractor. If you had an IRS audit during a year in which you treated a household worker as an independent contractor, it would set a precedent and constitute a safe harbor under Section 530; the IRS could not reclassify your workers as employees in subsequent years.

But Section 530 has a major hurdle: To qualify for relief, taxpayers must not have filed a tax form claiming the workers as employees. Note: Section 530 does not permit an employee to be later reclassified as an independent contractor.

Nevertheless, in an unclear situation, the cautious taxpayer may decide to treat his or her household workers as employees and pay taxes on wages exceeding the $1,000 threshold.

In contrast, the aggressive taxpayer will consider whether Section 530 and subsequent court cases offer a basis for treating his or her household workers as independent contractors.


Sidebar to main article

INDEPENDENT CONTRACTOR STATUS

The following are some of the common-law tests that may be applicable to a part-time household worker. An independent contractor:





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