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Definition: Independent Caregivers & Household Employees
When the decision has been made to hire an independent, in-home caregiver instead of a home care agency, it is important to understand the definition of an independent caregiver and a household employee according to the Internal Revenue Service (IRS).
The term independent caregiver is commonly used to describe a home care professional who does not work for an agency. According to the IRS, if a privately hired / independent caregiver is paid more than $2,100 per year (in 2019), they are considered a household employee, not an independent contractor. Thus, the family hiring the independent caregiver takes on all the responsibilities of being an employer, which includes payroll and taxes.
The reason for this designation is because when one hires a caregiver, the employer has control over what time they arrive, their activities, etc. In contrast, an independent contractor has the freedom to choose what days and hours they work.
Throughout the rest of this article, we will use the terminology “independent caregiver” to refer to a privately hired caregiver. But as mentioned before, for tax purposes, the caregiver is considered a household employee.
Did You Know?
Independent caregivers can be 30% – 40% less expensive than home care agencies.
Steps to Hire an Independent Caregiver
1. Determining Level of Care / Writing Job Description
Before hiring an independent caregiver, it is important to determine the level of care that an elderly loved one requires. For instance, take an elderly individual who lives alone and needs companionship, light housecleaning and assistance with errands versus a person with Alzheimer’s who lives with their adult child. This individual might require medication and need extensive care five days a week to allow their primary caregiver to work. These two individuals require very different levels of care and care activities.
Once the level of care has been determined, a job description should be written that is as detailed as possible. One will want to include how many hours and days per week that care is needed and any special skills / training required, such as experience with Alzheimer’s / dementia care. All duties the caregiver is to perform should be detailed in the job description. These could include:
- Driving or accompanying the senior to and from appointments
- Running errands
- Providing supervision and companionship
- Managing medication
- Assisting with bathing and grooming
- Preparing meals
The personal qualities one is seeking in a caregiver also should be covered. Such as a patient individual with a cheerful, upbeat personality.
2. Determining Pay Rate
There are two factors that go into determining the pay rate for independent caregivers: federal law and local market pricing.
Depending on the region of the US, families should expect to pay independent caregivers between $10 – $20 per hour.
Independent caregivers are considered household employees, and household employees are considered non-exempt employees. This means they are subject to the Fair Labor Standards Act (FLSA) guidelines. The FLSA is a federal law that sets the minimum wage, as well as requires overtime to be paid for those who work over 40 hours / week. Family members or related caregivers are not exempt from this law.
As of 2019, the federal minimum wage is set at $7.25 / hour. However, some states and cities have set a higher minimum wage. For instance, in Illinois, the minimum wage is higher in Chicago than in the rest of the state. To see minimum wage by state or region, click here.
Regional economic factors greatly impact the hourly rate independent caregivers are paid. In just a few isolated areas, caregivers make minimum wage. In most locations, independent caregivers are paid between $10 – $20 per hour. The average hourly rate for home care agencies is available here. Independent caregivers are typically paid 30% less than home care agencies.
3. Finding and Interviewing a Caregiver
There are many avenues in which one can find an independent caregiver. Ask friends, neighbors, senior centers, churches, the senior’s primary doctor, and social workers if they know a senior caregiver who is looking for work. Search and / or post the position on online job boards, such as Craigslist.org, or look / place an ad in the classified section of your local newspaper. Another great resource is to contact your local Area Agency on Aging (AAA), and ask if they know of any senior caregivers in the area in which you live. Click here to find the AAA in your area or use a 3rd party service to find an independent caregiver.
An initial interview over the phone can help narrow down applicants before interviewing in person. This can be kept simple and include the basics, such as the hours / days one is expected to work, specific caregiving duties, and policies to be followed, like not smoking in the house. The next step would be in-person interviews and are more in-depth. Ask applicants plenty of questions and cover topics such as:
- Previous work experience
- Training / special skills
- What they have liked / disliked about previous jobs
- How they would handle a difficult care recipient
- What they like about working with seniors
Finally, have them meet the person for whom they will be providing care.
4. Conducting a Background Check
Once a caregiver has been chosen, a background check is very important. A background check may include the following:
- Confirming prior employment
- Checking references
- Verifying certifications / licenses
- Doing a criminal background check
- Checking credit reports
- Obtaining DMV records
There are several ways in which one can have a background check conducted. For instance, one may go through a law office or a private investigator, as they often have specialized databases, allowing them to do background checks. One may also opt to go through an online company, which is generally more affordable (expect to pay less than $100). Make note, formally, one needs a signed release from the potential caregiver in order to perform a background check.
5. Creating an Independent Caregiver Contract
Once an independent caregiver has been hired, a job contract (also known as an employment contract) needs to be signed. This is a written agreement, and should include the following:
- Start date of employment
- Payment amount
- Vacation days
- Duties the caregiver is to perform
This is an important way to protect oneself as an employer in the event questions arise about what the job entails. An example of an independent caregiver contract agreement can be found here. The caregiver should sign two copies, one for the caregiver and one for the employer.
Responsibilities as a New Employer
Having a newly hired employee makes the family the employer, and as an employer, there are certain tasks one must complete. While initially these seem confusing and daunting, know that there are services that can help and that for the most part these are one-time activities.
1. Get an EIN (Employer Identification Number). This is sometimes referred to as FEIN (Federal Employer Identification Number). This is a nine-digit identification number one obtains from the IRS. There is no fee required and it will be needed to file IRS and SSA (Social Security Administration) tax forms for one’s employee. Apply for an EIN online.
2. Register with your state revenue department as an employer to get a state tax identification number. (Most states require that employers get two state tax identification numbers). These numbers are for state income taxes and state unemployment insurance. For a list of state tax agencies, click here. Make note, not all states have income tax. As of 2019, the following states do not have state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Furthermore, New Hampshire and Tennessee only tax income and interest earned on investments.
3. Get Workers Compensation Insurance / Disability Insurance. This insurance protects both the employer and employee if an injury happens. For example, if an independent caregiver is hurt at work, this type of insurance will cover medical expenses and lost wages. Most states require employers to get Workers Compensation Insurance. To find out which states require this type of insurance, click here.
4. File a USCIS Form I-9. This is an Immigration Status / Employment Eligibility form to ensure one is eligible for employment in the U.S. (meaning they are a U.S. Citizen or a legal alien). This form must be completed prior to an employee’s first day of work and kept with one’s employee records. One can download Form I-9 here. Note that the caregiver’s Social Security number is required.
5. Complete a Form W-4. This is an Employee’s Withholding Allowance Certificate, which is used by the IRS to determine how much federal income tax is to be withheld from an employee’s paycheck. It must be filled out prior to the first pay period. To download this form, click here. Note, household employees, such as private caregivers, are not required to have federal income tax withheld from their paychecks. However, they may do so if they wish. To assist one in determining how much federal income tax they would like deducted, click here.
6. Complete a State W-4. This form is for the state’s Department of Revenue and is filled out to determine how much state income tax is to be deducted from one’s payroll. However, as mentioned previously, not all states have income tax. For those that do, some allow the same withholdings as for federal income tax. Make note, states often refer to the state W-4 by a different name. For example, in Alabama it is called A-4 and in Hawaii it is called HW-4. To determine which states have state income tax and / or to find the relevant form, click here.
7. Report the new hire to the state. Some states accept a W-4 for the purpose of reporting a new hire. However, not all states do. Locate the website for each state in regards to new hire reporting here. Make note, in most states, one must report a new hire within 20 days. However, some states require new hires be reported in fewer than 20 days.
Ongoing Management & Payroll Responsibilities
Training & Managing the Caregiver
It is an employer’s responsibility to train an independent caregiver to perform the required duties to the employer’s and care recipient’s satisfaction. For example, if one of the job duties is to prepare meals, it is important to train the caregiver on what type of meals should be prepared. If the care recipient is diabetic, their meal plan will be very different from someone who has no health issues. As another example, if light housecleaning is a required part of the job, showing the caregiver exactly what one would like done and where the cleaning supplies are is key.
Another facet of being an employer of an independent caregiver is managing the caregiver. This means making sure one shows up to work and is on time, completes the required duties, does a good job, and so forth. Also, as part of managing a caregiver, one should expect to handle any issues or concerns that may arise from any of the parties involved. This can include firing an employee if the need arises and being sure to document the reasons why.
Managing Payroll & Withholdings
As employer of an independent caregiver, managing payroll can be a challenge. It includes calculating hours and pay, reporting payments to federal and state agencies, withholding and paying Social Security, Medicare, federal and state income tax, and Federal Unemployment Tax. For each tax and withholding, a complicated formula must be followed.
Did You Know?
Inexpensive 3rd party services can manage all aspects of caregiver payroll on a family’s behalf. Learn more.
Once an independent caregiver has been hired, first one needs to figure out the pay period, which is the starting and ending dates for which an employee is paid. Pay periods might be weekly, every other week, or once a month. The date on which one is paid is called payday. For every payday, the amount in which an employee is paid needs to be disclosed to federal and state agencies, like the Social Security Administration and the Internal Revenue Service.
From each paycheck, employee taxes are withheld. It’s important to note, both employers and employees are required to pay taxes on the wages earned by an employee.
- Social Security Tax – This is both an employer and employee / caregiver tax. As of 2019, the employer pays 6.2% and the employee pays 6.2% (12.4% total) up to $132,900 in employee wages. Please note, if an independent caregiver does not make $2,100 / year, neither the employer nor the employee are required to pay Social Security tax.
- Medicare Tax – This is both an employer and employee / caregiver tax. As of 2019, an employer pays 1.45% and an employee pays 1.45%. (2.9% total) on all employee earnings. If an employee earns more than $200,000 / year, the employee must pay an additional 0.9% for earnings over this amount. The employer is not required to match this higher tax. Again, if the independent caregiver does not make $2,100 / year, neither the employer nor the employee are required to pay Medicare tax. The combination of Social Security and Medicare taxes is sometimes referred to as FICA taxes. In other words, FICA taxes consist of 6.2% Social Security tax and 1.45% Medicare tax, both for the employee and employer. Combined this equals 12.4% in Social Security tax and 2.9% in Medicare tax. Make note, some employers choose to pay an employee’s portion of FICA taxes.
- Federal Income Tax – A caregiver / employee only tax. Household employees, such as private caregivers, are not required to have federal income tax withheld from their paychecks. However, if an employee requests that federal income tax be withheld, an employer may do so. It’s important to note, just because federal income tax does not have to be withheld, a household employee is still required to pay federal income tax.
- Federal Unemployment Tax (FUTA) – This is a federal tax that employers must pay, which allows employees who lose their jobs to continue to receive wages. As of 2019, employers pay 6% tax on an employee’s wages if an employee makes more than $1,000 / year. Any amount over $7,000 / year is not taxed. However, there is a potential of a 5.4% tax credit against the FUTA tax.
- State Unemployment Tax – This is a state tax that is employer paid. The amount varies by state, and not all states require employers to pay state unemployment tax. To determine if one’s state requires an employer to pay this type of tax, one needs to contact their state unemployment tax agency. For a list of agencies by state, click here.
- State Income Tax – Not all states require that state income tax be paid, but if they do, this is an employee tax, and the amount owed will vary by state. Click here to find out which states have a state income tax.
To summarize, an employer must withhold from each employee’s paycheck 6.2% for Social Security Tax, 1.45% for Medicare Tax, Federal Income Tax (if applicable), and State Income Tax (if applicable). An employer also owes an equal share of Social Security and Medicare Tax for every paycheck. In addition, an employer needs to pay Federal Unemployment Tax and potentially State Unemployment Tax.
Example: Independent Caregiver Payroll Deductions
Cassandra works as an independent senior caregiver a total of 20 hours per week at $13.00 / hour. She is paid every two weeks.
Total Cash Wages: $13.00 x 40 hours = $520.00
Cassandra’s Portion of Social Security Taxes: $520.00 x 6.2% (0.062) = $32.24
Cassandra’s Portion of Medicare Taxes: $520.00 x 1.45% (0.0145) = $7.54
Therefore, one must withhold $39.78 ($32.24 for Social Security Taxes and $7.54 for Medicare Taxes) from each paycheck if hours and hourly wages remain the same.
One’s employer owes an equal amount of Social Security Taxes and Medicare Taxes for their employee. In this case, Cassandra’s employer also owes $39.78 for each pay period.
* Remember, based on an employee’s W-4 and State W-4, additional taxes may need to be withheld. This amount is based on what an employee selects on these forms (if applicable).
Paying Employee / Employer Taxes
Calculating taxes and withholdings, as described above, is only half the challenge associated with employing an independent caregiver for your loved one. One must also pay the taxes they owe, plus employee withheld taxes, to the appropriate organization at the appropriate time of month, quarter, or year.
Federal taxes must be paid, at a minimum, once a year, and in most cases, state taxes must be paid on a quarterly basis. In general, both federal and state taxes can be paid electronically or via paper.
Remember, not all states have the same tax requirements and it is important to check the tax laws and filing dates in one’s state. Contact one’s state revenue department to learn what state tax forms need to be filled out and when they are due. In addition, check with one’s state’s labor offices for additional requirements.
To see the IRS Household Employer’s Tax Guide (Publication 926), which provides additional helpful information, click here.
Important Paperwork / Filing Dates for Tax Returns
January 31st – The Form W-2 is used to report gross pay and withholdings. An employer must complete this form for the caregiver at the end of the year for purposes of filing taxes and provide copies B, C, and 2 to the caregiver. Additionally, the Form W-2 copy A, as well as Form W-3 (Transmittal of Wage and Tax Statements) must be filed with the SSA either electronically or by paper. To file Form W-2 and Form W-3 electronically, which is free of charge, click here.
April 15th – (For residents of Maine and Massachusetts, the date is April 17th) – The Schedule H (Form 1040), Household Employment Taxes Form, should be filed with an employer’s Individual Income Tax Return – Form 1040.
Just a reminder, the above filing dates are for Federal filing. State deadlines may be different from Federal dates. Make sure to keep all employment tax records for a minimum of four years from the date in which taxes are paid.
For non-exempt employees, such as independent caregivers, there are several records that must be kept by the employer. This includes the employee’s full name, social security number, address, sex, occupation, and regular hourly wage. All dates of payments, as well as the pay period, should also be recorded. Make sure to record the total number of hours one works each week, the number of hours worked each day, any overtime, and the total amount paid each payday. In addition, any federal income tax, social security tax, Medicare tax, and / or state employment tax withheld should also be recorded. Relevant tax paperwork, such as Form W-4, Schedule H, and Form W-2 should also be kept in an employer’s records.
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Importance of Paying a Caregiver Legally
While it may seem less of a hassle and less expensive to pay a caregiver under the table, there are several reasons why doing so is not in the employer’s / family’s best interest.
- Most importantly, the IRS considers paying independent caregivers under the table to be tax evasion. If caught, there may be penalties, including owing back taxes.
- For many families, caring for an elderly loved one becomes too expensive, and eventually the individual may qualify for Medicaid. Having paid for a caregiver legally will greatly facilitate the Medicaid application and acceptance process. Phrased another way, having paid the independent caregiver under the table will greatly complicate getting accepted into Medicaid and could even result in being denied acceptance or delaying acceptance for many months or even years.
- Paying a caregiver under the table means they will not have disability insurance. Should an injury occur, there is a greater likelihood of the family becoming involved in a lawsuit.
- Paying a caregiver by the book means a family may be eligible for tax credits. Most relevant are the Federal Tax Credit for Elderly Dependent Care and the Medical Care Tax Deduction.