Q. We are getting ready to hire a new caregiver for my mom, and she is an independent contractor. Prior to now, we have hired caregivers from an agency. The caregiver has asked about being paid in cash, which will amount to $3,000 per month. How does payroll, taxes, and insurance work for an independent contractor? When it comes to applying for Medicaid, what level of documentation will we need when it comes to hiring this caregiver? We would greatly appreciate any help or guidance you might be able to provide.
A. Many older adults prefer to stay in their home for as long as possible in their later years. To support an aging parent or other loved one, many of us hire someone to help them out with daily tasks at home. This arrangement is called in-home care, or sometimes in-home assisted living. 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 $2,300 per year (in 2021), they are considered a household employee, not an independent contractor. So, in this instance, the family hiring the caregiver takes on all the responsibilities of being an employer, which includes payroll, taxes, and insurance.
Payroll, Taxes, and Insurance for a Household Employee
As mentioned, independent caregivers are considered household employees, and household employees are considered non-exempt. 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.
To hire a household employee, the following needs to be done:
- Caregiver Agreement needs to be signed. This is a written agreement, and should include the following:
- Start date of employment;
- Expectations;
- Payment amount and frequency;
- 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. The caregiver should sign two copies, one for the caregiver and one for the employer.
The Caregiver Agreement is extremely important if you are hiring a family member for caregiving services, because otherwise Medicaid will generally look at money transferred to a child as a gift, potentially creating a Medicaid penalty period.
The exact terms allowed under a Caregiver Agreement vary from state to state. A Medicaid expert, such as myself, will be aware of your state’s rules and exclusions. For more details on what should be included, please see my article on this subject.
- 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.
- 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.
- Get Workers Compensation Insurance. This insurance protects both the employer and employee if an injury happens on the job. 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.
- 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.
- 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.
- 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.
- 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.
- Once she starts working, your caregiver should keep a log of hours and dates for specific services provided, and report this income on taxes. Depending on your state and exact circumstances, a self-employment tax may apply. The care recipient should keep up regular payments per the agreement. Both parties should review and update the agreement annually, or any time the terms change (caregiving hours increase, rate increase, service change).
As employer of a household employee such as a 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. For more information on this and other issues regarding taxes and household employees, please see Publication 926 (2021), Household Employer’s Tax Guide. To make this task much easier on yourself as a household employer, you should strongly consider engaging the services of a payroll company that does all or most of these payroll services for you, such as https://www.homeworksolutions.com, https://www.surepayroll.com, or https://www.care.com/homepay.
Why You Shouldn’t Pay a Caregiver Under the Table
In order to safeguard against negative consequences, all paid caregivers should be employed legally. This is true for many reasons, including those involving Medicaid eligibility. Here’s why:
- Legal proof of employment: Paying family or other caregivers under-the-table will provide no legal documentation of their employment with you. This will likely bring the validity of payments into question during Medicaid’s look back and they may be penalized as gifts, especially if the caregiver is a family member. Legal proof of employment may be required for each of your paid caregivers should you apply for Medicaid. This will be easily provided if your employees have paid taxes and been issued W2s for their caregiver income.
- Liability and protection from lawsuits: If you were to pay a caregiver under-the-table, you would be personally liable for any injury or illness they receive on the job. This means if your caregiver should happen to have an accident, such as slipping on your icy sidewalk and breaking their hip, they could sue you for the medical bills. You could end up paying these expenses out-of-pocket. By employing your caregiver legally and obtaining worker’s compensation insurance, this insurance can help protect you from this type of lawsuit. Workers’ compensation covers lost wages and medical treatment of an employee’s work-related injury or illness.
- Tax evasion: When employees are paid off-the-books and don’t report their caregiver income on taxes, they are participating in tax evasion. By not paying household employer taxes, you are also evading necessary taxes. Individuals caught evading taxes are generally subject to substantial penalties from the IRS. In order for your caregiver to be legally employed, all required federal, state, and local taxes must be withheld and deposited throughout the year, taxes must be processed, and W2s must be issued to caregiver employees, as described earlier in this article.
Medicaid Laws are the Most Complex and Confusing Laws in Existence. We Can Help!
We hope your caregiving situation works out well for your mother for as long as she is able to stay at home.
If your mother or another loved one is nearing the need for assisted living or nursing home care, or already receiving assisted living or nursing home care, we can help to legally protect your family’s hard-earned assets from the catastrophic costs of nursing home care.
Nursing homes in Metro DC area cost $10,000 – $14,000 a month. Generally, the earlier someone plans for long-term care needs, the better. But it’s never too late to begin the process of Long-term Care Planning, also called Lifecare Planning, Medicaid Asset Protection Planning, or just Medicaid Planning.
Medicaid laws are the most complex and confusing laws in existence, and impossible to understand without highly experienced legal assistance. Without proper planning and legal advice from an experienced elder law attorney, such as myself, many people spend much more than they should on long-term care, and unnecessarily jeopardize their future care and well-being, as well as the security of their family. Please read the Medicaid Complexity page on our website for more details, and call us at any time to make an appointment for an initial consultation:
About Evan H Farr, CELA, CAP
