United States: Home Sweet Home—Best Practices For Hiring Household Workers

Last Updated: June 20 2019
Article by Joshua F. Alloy and Mary Cassidy

So you and your family are planning to hire someone to work in or around your home? Whether that person is a housekeeper, nanny, gardener, chef, driver, caretaker, estate manager, or someone in any other household position, you and your family need to make sure you have done your due diligence and are properly following all relevant local, state and federal employment and tax laws. We have set forth below some general guidelines and best practices to consider—while they are by no means meant to be exhaustive, they should provide you, your accountant and your legal counsel plenty to plan for and think about.

  1. Determine the Proper Relationship: Do you plan to engage a third-party company to perform the work; hire an employee through a staffing agency; retain an independent contractor; or hire an employee directly? Keep in mind that while most household workers are your employees or co-employees, if a staffing or other third-party company provides the worker and controls what work is performed and how it is performed, that worker is likely not your employee. Similarly, a worker may be an independent contractor—and not your employee—if you do not control how the work is done, and the worker provides their own tools and equipment and offers services to the general public as an independent business. Before engaging anyone as an independent contractor you should carefully consider the various independent contractor tests under tax, wage/hour and state law and consult with legal counsel.
  2. Decide Whether to Use an LLC or Other Entity to Employ the Workers: Another consideration for families when hiring household workers is whether to employ those workers personally or through a family office, LLC or other entity. While there may not be significant tax benefits and the employees may remain common law employees of the family, using a corporate entity could provide important privacy protections, administrative and recordkeeping efficiencies, and greater protection against liability for injuries or property damage in certain circumstances. Make sure to discuss the pros and cons of forming a separate entity with a tax or financial advisor and your legal counsel before making any decision.
  3. Proceed with Caution when Conducting Background Checks: It is a good idea to request a background check from a reputable third-party company when hiring anyone to work in or around your home. Keep in mind that a background check performed by a third party is subject to the Fair Credit Reporting Act which requires specific disclosures and authorizations. In addition, many cities and states have enacted restrictions and limitations on criminal background checks and even credit checks in some places, including whether and when such checks can be performed (e.g., only after a conditional offer of employment has been made), and when they can be relied upon to rescind an offer.
  4. Document the Relationship: Make sure to put in place written offer letters or employment contracts with each worker. At a minimum, these letters should document the proper wage rate, expected hours to be worked each week, whether the employee is entitled to overtime, what employee benefits (if any) the employee is entitled to, and the at-will nature of the relationship and how it can be terminated by either party. If the contract is with a third-party staffing agency or company, carefully review the contract to ensure that the third party is responsible for complying with all laws, including with respect to wages, overtime, taxes, and other employee benefits and that there is an adequate indemnification provision in favor of you and your family.
  5. Require Employees to Sign a Non-Disclosure/Confidentiality Agreement: Because household employees will be working in and around your home(s), they may learn personal and private details about you, your family members and friends, and your finances. It is critical to require each employee—at the outset of employment—to sign a Non-Disclosure/Confidentiality Agreement in which they agree to keep all such confidential and personal information private and not to disclose it to anyone else except as part of their work (with limited exceptions required by law).
  6. Keep Track of Hours and Overtime: First, you will need to determine if each employee is entitled to overtime under the Fair Labor Standards Act and applicable state law. Most domestic workers are entitled to overtime when they work more than 40 hours in a week, unless they are managing part of the household or closely supervising other employees; in addition, certain live-in domestic workers may also be exempt from overtime, depending on the state. Second, make sure that all employees are paid at least the federal and local minimum wage, or the minimum salary threshold if they are exempt from overtime. Third, develop a mechanism to accurately record and track hours worked each week—some localities, like Washington, DC, require a record of the precise hours worked each day by non-exempt employees, not just the daily total.
  7. Follow State and Local Law: Depending on where you live, your household employees may be entitled to a variety of additional employee benefits, including paid sick leave, payout of accrued but unused vacation, paid family or parental leave, short term disability, or daily overtime. In addition, federal as well as many state and local laws require employers to post a number of employment law notices and provide employees with a variety of additional notices and pamphlets describing their rights as workers. These notices and posters can be found online, or can be purchased through various third party providers.
  8. Report Wages and Pay Federal Payroll Taxes: For each employee to whom you pay cash wages of at least (i) $2,100 in 2019, you must withhold and pay Social Security/Medicare taxes, or (ii) $1,000 in any calendar quarter in 2019, you must pay federal unemployment taxes (FUTA). You are not required to withhold federal income taxes from your employee's pay, but if you do so, you must obtain a completed Form W-4 from your employee. Social Security/Medicare taxes (employee and employer portions), federal income tax withholding and FUTA are reported each year on your Form 1040, Schedule H and are paid to the IRS when you file your Form 1040. In addition, if you are required to withhold Social Security/Medicare taxes, or you choose to withhold federal income taxes, from your employee's pay, you must issue a Form W-2 to your employee and file a copy with the Social Security Administration. In order to file Form 1040, Schedule H and issue a Form W-2, you must obtain a federal employer identification number. Many families contract with a payroll provider to handle both payroll and taxes, but you should discuss this with your financial/tax advisor.
  9. Follow State Wage and Payroll Tax Rules and Obtain Workers' Compensation Insurance: You should consult with your financial/tax advisor to determine if you are required to withhold state and local income taxes and/or pay state unemployment insurance. Although workers compensation rules vary from state to state on what is required, if you employ a worker in or around the house, you should purchase workers' compensation insurance or determine if your homeowners insurance policy provides adequate coverage.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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