If you hire someone to work in your home – as a housekeeper or to provide childcare – chances are you are an employer in the eyes of the IRS. That means added cost and hassles settling with Uncle Sam. You may consider that an understatement if you remember the firestorm that flared around this issue when President Bush's first choice to head the Department of Homeland Security dropped out of the running after it was learned he had failed to pay the proper taxes for a household employee.
The first step is to determine whether the person working in your home is your employee or an independent contractor. If he or she's an employee, you're stuck with the paperwork and the expense. If not, you're spared.
Unfortunately, the distinction is often unclear. Here, though, are three quick tests to clear things up:
Control. The more you have to say over when, where and how the person works, the more likely he or she is an employee.
Chance for profit or loss. If the worker is in business for him or herself, there's a risk for loss as well as an opportunity for profit. When there's no risk for loss, the person looks like an employee to the IRS.
Continuity. The more often someone works for you and the longer the arrangement exists, the more likely the person is your employee. Someone you hire to care for your children in your home is almost sure to be your employee. A part-time housekeeper may or may not be. If the housekeeper supplies the equipment and materials and works in numerous homes, he or she might qualify as a self-employed, independent contractor.
When you hire someone through an agency that treats that person as its employee, you're clearly off the hook. (These distinctions don't matter when the person working in your home is your parent. An exception almost always lets you ignore the employment-tax rules.)
When the person working in your home is your employee, you're an employer. And you need an employer identification number. Apply for one by filing Form SS-4 with the IRS, or let the IRS assign one automatically the first time you file a required employer tax form. (See tax tips for Employer Identification Number.)