Nannygate Revisited: Do You Really Owe Taxes On Your Baby-Sitter?

Nannygate may have vanished from the front pages, but it has caused unnecessary concern - even panic - among Government officials and our citizens. What originally was a violation of immigration law by Zoe Baird has evolved into a White House inquisition into the hiring of household workers, regardless of immigration status, by prospective Administration officials. Many citizens are concerned that by hiring a neighbor's teenager as a baby-sitter or using a housekeeper on a part-time basis, they were required to file the federal information return (Form 942) and to pay Social Security and Medicare taxes on their "employees." Common sense tells us these baby-sitters and housekeepers are "independent contractors" - not employees - but common sense is often at war with this country's tax laws.

Employee vs. Independent Contractor

In reality, the tax issue is straightforward: Is a household worker an "employee" or an "independent contractor?" Unfortunately, the answer is buried deep within the caverns of our tax laws. It involves a federal statute curiously omitted from the tax code and never mentioned in the Form 942 instructions.

That federal statute, Section 530 of the Revenue Act of 1978, is a powerful - but little publicized - antidote to the Nannygate hysteria. But Section 530 has a major hurdle: in order to qualify for relief, taxpayers must not have treated household workers as employees, something done by filing Form 942.

So those who may have panicked and filed Form 942 have probably done themselves irreparable damage by irreversibly classifying a worker as an employee, since Section 530 does not permit an employee to be later reclassified as an independent contractor. For those who did not file a Form 942, common sense should emerge the victor.

Some history: In 1978, responding to aggressive attempts by the IRS to reclassify workers from independent contractors to employees, Congress enacted Section 530. Under Section 530, the IRS is bound by the taxpayer's classification, if the taxpayer had "any reasonable basis" for making that determination, Congress directed that the reasonable basis standard should be "construed liberally in favor of the taxpayer." The Federal District and Appellate Courts have since embraced the liberal construction of Section 530, siding with taxpayers whenever a legitimate dispute existed.

The "Any Reasonable Basis" Standard

Section 530 states that the "any reasonable basis" standard may be satisfied by meeting any one of three statutory "safe havens," which are, in general:

  1. judicial precedent and published IRS rulings;
  2. a past IRS audit of the taxpayer where no assessment was made regarding employment taxes; and
  3. a long-standing recognized practice of a significant segment of the industry in which the worker was engaged.

These safe havens are not exclusive; the taxpayer may demonstrate a reasonable basis in some other manner.

In 1991, a federal district court held that the "any reasonable basis" standard applied to the traditional common-law rules regarding worker classification. This decision, which constitutes judicial precedent under the first safe haven, could justify classifying most part-time baby-sitters, housekeepers, gardeners, and other household workers as independent contractors (see below).

Full-Time Household Workers

In fact, taxpayers with full-time household workers may still obtain relief - under the second or third safe haven above. Also, the IRS declared in Rev. Ruling 77-279 that an individual providing full-time child-care services was engaged in an independent trade or business. This constitutes a published ruling under the first safe haven above and may be applicable to full-time or part-time child care and baby-sitters. Although the worker in Rev. Ruling 77-279 provided child care in the worker's own home, this was not a factor in the IRS ruling.

Act Cautiously

Before you file Form 942, consider whether Section 530 and the subsequent court cases offer a reasonable basis for treating your household workers as independent contractors. Do not let the confusion of Nannygate and illegal work status issues trap you into an irreversible filing. Section 530 was enacted to protect you from the IRS on these issues - use it.

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:

  1. works part-time for any one person;
  2. works for one or more unrelated persons at the same time;
  3. negotiates dates, times and hours for the work;
  4. is paid on a per-job basis;
  5. is free to accept or decline assignments;
  6. offers his or her services to the public (such as through advertising or classified ads);
  7. works in teams, uses helpers or delegates the work to someone else;
  8. uses his or her own tools and equipment;
  9. is hired to produce a certain result (a clean house, a well-groomed garden) and is not given step-by-step instructions for accomplishing the task;
  10. is not trained to perform the services in a particular manner by the person hiring the worker; and
  11. does not have a continuing relationship with the person hiring the worker.

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All contents copyright 1995-2003 Robert L. Sommers, attorney-at-law. All rights reserved. This internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.