Caregiver vs. W-2 Reporting
© Ben A. Tallman EA
I believe the single-issue of improperly reporting caregiver income will be the most dangerous and volatile topic over the next decade. Why? Because the improper reporting of caregiver income could cost our clients thousands of dollars in ‘denied medical deductions’ and in ‘unpaid payroll taxes’. If that doesn’t get your attention, include the Department of Labor adding thousands more for missed “over-time” pay and penalties. Mishandling this item could create a disaster for our clients and a legal “night-mare” for us.
Sorry to startle you, but I wanted to get your attention. This is a topic that keeps me up at night. I am willing to guide you through the labyrinth of mazes that surround this topic. My torch is lit and I am inviting you to traverse the terrain and unravel the confusion associated with this issue. Are you willing to come along?
So what is the issue? It is the proper reporting of wages to a domestic employee. A domestic employee is someone that you employee to work in or around your home. This can include individuals who are gardeners, landscapers, housekeepers, maids, caregivers, and even your handyman. For our discussion, let’s limit this to caregivers. How should they be paid? The IRS says it depends on their employment status and the control you have over them. If you pay a company that already treats them as employees then the answer is obvious and you are “off the hook”. However, if these are individuals, even including sole-member LLCs (a disregarded entity), then you must look at the behavioral, financial, and relationship control you hold over the worker and the way they perform their duties. Do you tell them when to come to work? Do you tell them what to do? Do you provide all the items they need to perform their job? Is there a potential for them to lose money by working for you? Do they perform the same job for anyone else? If the first three answers are ‘yes’ and the last two are ‘no’, then you probably have a domestic employee. Domestic employee earnings are to be reported on a W-2 Form; and yes you can still use Schedule H at the end of the year to pay their FICA and withholding tax.
What about 1099 Forms? You will hear colleagues and even attorneys advise us that paying a caregiver on a 1099 is okay. I disagree. The law is specific when it comes to individual caregivers working in your home (or parent’s home). Unless the individual is a certified specialist that works for several families, the 1099 argument has no merit. The bigger problem is with the Department of Labor, who will insist they are employees. DOL might also be interested in the number of hours worked per day or per week to determine if “over-time pay” is warranted. In 2012, the average ‘live-in’ caregiver was paid over $75,000 for the year. This is based on the 24/7 care required to watch an elderly or disabled person. Do you think that “over-time pay” was considered in the equation? I wouldn’t bet on it.
We have talked about the IRS and the DOL, but we haven’t considered long-term caregivers that go to apply for Social Security. When they visit the SSA to apply for their benefits and it is determined they have no Social Security Taxes paid in; who do you think they come looking for to pay the back FICA taxes? It will be the families that have hired them for years and never reported their wages on a W-2. When this happens, do you think their “tax advisor” could be sued for malpractice or willful negligence? How good is your E&O Insurance? Do you see where I am going with this?
I have heard stories where the caregiver refused to provide their social security number to report the income. Are there reasons they would not want to report this income? This amount of income could revoke Section 8 Housing, Food Stamps, Temporary Disability Payments, and other programs based on low-income qualifications. The reasons could be endless, but in order to satisfy the caregiver, we would sabotage the tax benefits of the taxpayer. Don’t forget the additional problems we would be facing with SSA & DOL.
Let’s take a look at the potential tax deduction for hiring a caregiver. First we must determine that the person being cared-for can no longer perform two of the six activities of daily living (or ADLs). These six activities are listed below and the deficiency to perform at least two of the activities along with a doctor’s statement makes the caregiver expense deductible:
- Eating, the ability to feed oneself, though not necessarily prepare food
- Personal hygiene such as grooming and oral care (aka toileting)
- Transferring oneself from seated to standing and get in and out of bed
- Ability to bath or shower oneself
- Dressing including the ability to make appropriate clothing decisions
- Maintaining continence or the ability to use a restroom
With the doctor’s diagnosis, stand-by care can be prescribed which will allow an unlicensed caregiver to help out. As long as, the caregiver is paid as an employee, the expense can be deducted under medical expenses on Schedule A. Since this usually involves tens of thousands of dollars per year, the 7.5% or 10% medical deductible will not be a problem. The critical keys to this working are the doctor’s diagnosis and then payment to the caregiver as an employee on a W-2 form.
To read more about this topic check-out irs.gov or Google on ‘domestic employees’, ‘caregivers’, Schedule H (Instructions and Q&A), Form 8919 (Instructions and Q&A), and SS-8 (Instructions and Q&A). I hope you now join us in the realization that the proper reporting of caregiver income is essential to the safety of our clients and to the integrity of our business.Ben Tallman is a Tax Practitioner from Atlanta, Georgia. He has taught as an instructor of
local, state, and national organizations for the past decade. Ben has served on the NAEA
National Board as an Educational Foundation Trustee, as a member of the IRS Regional
Liaison Committee, and as Educational Director for GAEA. He recently appeared on Tax
Talk Today in a discussion on the Affordable Care Act. Ben is an NTPI Fellow and recently
celebrated 40 years in tax preparation.