Are Helpers Your Employees or Independent Contractors?

6a0133f3fc5805970b014e8707ecd3970d-320wiI hate answering this question. Why? Because many family child care providers across the country are not following the proper rules. This can get them into serious trouble.

A person who comes into your home to help you care for children is considered your employee, not an independent contractor. It doesn’t matter how little you pay the person or how few hours the person works for you.

There are two exceptions to this general rule. The first situation is a person who is self-employed in the business of providing substitute care for child care providers.  Such a person should have a business name registered with your state and their own taxpayer identification number. She should work for more than one child care provider each year and use her own contract.

The second situation is when you hire a substitute through an employment agency and you pay the agency rather than the substitute.

Both of these exceptions are pretty rare. Anyone else that helps you care for children is your employee.

You hire someone for 3 hours to watch the children while you go to the dentist – Employee!

You pay a 16 year old girl in your neighborhood to help you care for school age children for 6 weeks over the summer – Employee!

According to the IRS Child Care Provider Audit Technique Guide: “An employer-employee relationship exists when the business for which the services are performed has the right to direct and control the worker who performs the services.” Someone who is helping you care for children is clearly operating under your direction and control.

When I explain this at workshops, no one likes to hear it. This is because there are many consequences for hiring an employee. You must withhold Social Security/Medicare taxes from the employee’s paycheck and pay in these taxes quarterly (or annually, in some cases). You must withhold federal and state income taxes. You must file IRS Forms W-2 and W-3 at the end of the year. You may also have to purchase workers’ compensation insurance! (Contact your state for further information.)

Holy Cow! This is a lot of work. But there is no avoiding it. You can get help from a payroll service, or perhaps your tax professional.

Don’t let a tax preparer or anyone else tell you that you have an independent contractor if you pay someone less than $600 a year. If you fail to treat helpers as your employees the IRS can come after you for back payroll taxes, penalties and interest. Then your state can come after you for failure to pay state unemployment taxes and purchase workers’ compensation insurance.

This article is the second in a series of articles about hiring workers for your business.

See also:  “To Hire a Relative or Not?”, “What is an Independent Contractor”, “Are Helpers Your Employees or Independent Contractors?”“Your Payroll Responsibilities as an Employer”“Do You Need Workers’ Compensation?” andWhen Hiring Your Husband Makes Sense.”

Here’s story of what happened to a provider who didn’t follow the rules.

Tom Copeland – www.tomcopelandblog.com

Image credit: realsimple.com

2014 TW smallFor details on how to fill out the federal payroll tax forms, see my annual Family Child Care Tax Workbook and Organizer.

Tom Copeland, www.tomcopelandblog.com

 



Categories: Employees, Record Keeping & Taxes

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24 replies

  1. Ok you said they have to have a business name? Is that them just getting a TAX ID # and giving themselves a name?

  2. it also means registering their business name with the state.

  3. I have volunteer helpers (yay for mom and mother-in-law)! Are there any possible issues with this situation? Are we allowed to give thank you gifts? Deduct the cost of those gifts?

  4. If the volunteers are related to you then you can give them gifts. Such gifts would not be deductible and are not income to the relative. See my previous article “To Hire a Relative or Not?”

  5. This sounds somehow complicated. But I think for the meantime I have to absorb everything that you said on your blog since I have someone helping me at home doing some tasks.

  6. I totally go along you! I have often felt that way but nobody really would like to take it as seriously as we do apparently. Excellent blog anyway, I am going to have to stop by more frequently.

  7. I have been a college educated licensed daycare provider for 36 years, and I am saddened to see where this profession is going. The first intent of the provider used to be the children, parents and the family of the provider-in fact a bond of trust was extablished between all of them. Now it is micro-managed by rules and regulations passed down by good-doers who probably have never stepped foot into a home daycare. In all respects I’m sure it is well intended, but it seems like lawyers and crazy lawsuits are now ruling this business like all others. Basic rules and regulations need an interpretation from an attorney and an accountant and even then answers will differ. Additionaly license workers themself have different answers. Likiewise, required classes make little sense. For instance, the last one I attended told providers that “you must go into the bathroom with each young child” and “close the door for privicy” but “don’t let the other children out of sight”. Excuse me-a provider in the bathroom with a child with the door closed? And how do you “close the door” and “keep the rest of the group in your sight?” This is just one example of how crazy this is becoming.(And is there any wonder why there is such a high unemployment rate? When the government makes it so expensive and difficult to hire a college kid-otherwise unemployed- to help in a home daycare for a summer?)

  8. Jackie – I can’t disagree with anything you are saying. I’ve heard the same complaint about the stupid idea of bathroom privacy from other providers as well!

  9. Thank you for letting me vent. Another stupid suggestion in a class told us never to say you are “proud” of a child. Excuse me? I have raised seven of my own kids who are extremely successful-all in the top 3% of their class. I’ve had countless daycare children with whom I am still in contact with who are doing very well. I recently had one with a disfunctional home life come back to tell me his time with me was “the best years of his life”. All of them I am proud of and made that clear throughout their time with me. Here is a question for you, isn’t there a lawsuit waiting to happen for everything? Silly as it sounds, could I get sued for tutoring the children in my care if they flunk a test for instance? This is a serious question by the way. (By the way in the aboveformentioned class, we were told we should not use the bathroom during daycare hours. I guess we need “Daycare Provider’s Depends” This one is a joke-I think 🙂

  10. I think telling children you are proud of them is a terrific thing to do! You can’t get sued if a child flunks a test, unless you are selling your services with the understanding that that the child will pass the test. To protect yourself against all potential lawsuits, make sure you have business liability insurance.

  11. ok about this paying your employee situation I have been trying to figure this situation out for myself and someone that i am considering hiring to come in and help me to take care of the children.the employee wants to recieve taxes back at the end of the year I the employer was told by another provider that they give their employees a 1099 at the end of the year is that legal and how would that hurt or benefit the employee or the employer

  12. M. King – It’s illegal to give employees a 1099 and pretend they are independent contractors, when they are not. If you did this, and the employee got injured, you wouldn’t have workers compensation insurance and would be required to pay the persons entire medical bill – plus penalties. Also, the IRS can come after you and make you pay Social Security tax for the employee, plus interest and penalties. As my article makes clear – you can’t treat such people as independent contractors.

  13. What if you hire a tutor and music teacher to come to your family daycare to provide an extra service to clients? Are they employees or independent contractors?

  14. Tutors and music teachers and swim instructors, etc are independent contractors because the provider doesn’t direct and control their work.

  15. Just to clarify, if I hire a tutor to come to my daycare two-days a week for a total of 9 hours a week, then this tutor is an independent contractor? Thanks so much!

  16. I have a large family daycare license… if I have a tutor in the house with me am I allowed to have up to 14 children or just 6 kids because the tutor is an independent contractor and not an “employee”? Thanks!

  17. If the tutor is providing one on one help to children on specific topics that the tutor has specialized skills at teaching, then the tutor would be an independent contractor. If the tutor is doing the same work as any helper would do, then the tutor is an employee. Whether the tutor is an employee or an independent contractor has nothing to do with whether he/she meets your state child care regulations regarding staffing. Check with you licensor about this.

  18. I live in TX, what forms need my prospective employee to fill out? what forms I need to fill out?

  19. The federal form your employee needs to fill out is W-4. This will help you determine how much federal income tax to withhold. You will also need to file a quarterly Form 941 and an annual W-2 and W-3. You will also need to file state tax forms. See my article on this:http://www.tomcopelandblog.com/2011/04/the-many-responsibilities-of-hiring-an-employee.html

  20. Tom. We are in California, based on hiring a substitute. Or having someone come in as an Art/Music/ what ever teacher… We might be able to consider Independent Contractor.

    Also based on Who controls the work. We have a Large family Child care right now upto 14 kids per day. We are going back down to small. We still plan to have someone cover at times when Doctors appoints are needed etc.

    And bringing in specialized help for Art, or whatever… Based on Behavior control right now. We have certain tasks for Helpers to do, but they are not told to wipe the counter then dry. They can clean how they want. They can run circle time how ever they want. There are State standards, safety regulations, Food programs they have to follow.

    So we believe there is a way to classify a worker as an IC and not an employee.

    Common Law Rules

    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?

    Also on the IRS site it says some rules might suggest Employee, some might suggest contractor, some might overlap. You look at the whole picture.

    So any suggestions on how to properly classify a Worker as an Independent Contractor? Or maybe grant them a Partnership?

    Again we are going from a Large to a small child care due to the hassle of managing employees, hiring is a long processes, with finger prints, and interviews so thats cumbersome. And people calling in sick. etc. So lots of reasons to go small and not have to deal with a lot of that.

    We believe there is a way to follow the law and have that understanding, agreement Contract with a Worker to make them an Independent Contractor.

    Any suggestions are welcome!

    Thanks

    • Someone who comes in and does art or music lessons or only does cleaning would clearly be considered an independent contractor because you wouldn’t have the right to direct and control their work. Someone who comes in to care for children would be an employee unless they are set up as a substitute service and work for other providers. Someone who cleans and cares for children would be an employee. If you want further guidance on this, call me at 651-280-5991.

  21. Thanks will call you soon!

  22. Hi Tom,
    Just wanting to comfirm I am understanding this correctly. I had an someone working with my wife helping out in her daycare business she runs out of the house. Is this considered an employee or contractor? if an employee what are my steps to take care of wages from the last 3 months of 2016? Now effective Jan. 31st we have an EIN number and will be paid through payroll as the helper is now a full time employee.

    Any help is greatly appreciated

    thank you

    • Unless this person was self employed in the business of providing substitute care for other providers, she is your employee. Being self employed means she has a business name, registers her name with the state and uses her own contract. To catch up for the last three months of 2016, file IRS Form 941, W-2 and W-3. You should have withheld 7.65% in Social Security taxes from her wages, so you can pay that as well on Form 941. You should also pay federal unemployment tax using Form 940. Check with your state to see if you owe state unemployment tax and whether or not you must purchase workers compensation insurance.

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