Are Helpers Your Employees or Independent Contractors?

I 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.

The $600 Rule

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.

An independent contractor is someone who works for themselves and does not care for children. This person may clean you house, mow your lawn, or provide an activity for your business (puppet show, swimming lesson, dancing lesson, etc.).

If you pay an independent contract $600 or more you must issue IRS Form 1099 Misc and give a copy to the independent contractor and the IRS.

But, helpers who work for you caring for children are not independent contractors, so you should not be issuing Form 1099 to them!

Remember, your helpers are employees, not independent contractors, regardless of how little you pay them.

Watch Out!

Unfortunately, providers too often get bad advice about employees from their tax preparer.

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. The consequences can be severe.

Failure to treat helpers as employees is one of the biggest mistakes I see when I review provider’s tax returns as part of my Child Care Business Partnership program. It’s one of the benefits of this service ($15 a year for providers who use Minute Menu/KidKare). When reviewing tax returns I usually see many mistakes that are costing providers money.

Start by following the correct rules going forward.

See also:

Your Payroll Tax Responsibilities as an Employer 

Should You Hire Your Child Who is Age 18+ or Your Husband?

How to Hire Your Own Child Under Age 18

 

Tom Copeland

Image credit: https://www.flickr.com/photos/kitakitts/

For information on how to file all federal tax forms when hiring an employee, see my book 2016 Family Child Care Tax Workbook and Organizer.



Categories: Employees, Record Keeping & Taxes

4 replies

  1. I don’t like the answer, but I’m glad that you cleared this up! Thank you!

  2. Tom, is there a tax rule number or something similar that I can share with my accountant?
    Sue

  3. It is not that hard, friends. I did it all myself for my assistant, in 1990, all by hand. I consulted my enrolled agent because I could figure out the federal rules and forms but not the state ones. In ten minutes she had me on the right track.

    My child care assistant was mildly mentally challenged, and I told her that following these tax rules and procedures were an important way to treat her with the respect she deserved as an adult earning her way. At the time, there was a tax credit available to employers who hired people in certain circumstances, for up to 40% of their wages. That tax credit (don’t know if it is still available) made hiring her more affordable. Win-win-win

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