Hiring a housekeeper is an important decision. It's quite a process to research, interview and ultimately hire the right person for your home. Many people choose to hire independent contractors because it costs less than using a professional service that employs W-2 workers. If you do decide to hire an independent contractor, you'll want to be aware of the tax consequences of it. We'll discuss some of those issues here.
For advice that is specific to your situation, we recommend speaking to a tax professional familiar with your circumstances.
Is my housekeeper considered my employee?
The biggest question to answer is whether or not your housekeeper is your employee or an independent contractor. This is important because if the IRS or your state determines that your housekeeper meets the definition of an employee, you are responsible for withholding taxes from their pay and even paying employer taxes.
Let's start with annual wages. If your housekeeper earns more than $2,300 in a calendar year (Jan - Dec) then you'll need to ask yourself the following questions:
Do you decide when the housekeeper works?
Do you provide the supplies/tools for the housekeeper?
Do you instruct the housekeeper on how to clean?
If you answered 'Yes' to any of these questions and the housekeeper earned more than $2,300 in a year, then the IRS will most likely consider them your employee.
What employer taxes am I responsible for?
You most likely work for someone else. So all you have to do is look at your own paycheck to see the types and amounts of the taxes taken out of each check. If you think it's tough to see your paycheck reduced by that amount each payday, think about how much of a headache it will be to have to calculate those taxes and file the paperwork for your own employees.
As an employer, your are responsible for withholding Social Security and Medicare (FICA) taxes from your housekeeper's pay. You will also need to pay a matching portion of employer FICA taxes. To add to this administrative task list, you'll also need to provide your housekeeper with a W-2.
You may have heard that you need to file a 1099 form. But this is only for independent contractors who earn more than $600 in a calendar year.
Why is it bad to get paid under the table?
Many people think that hiring independent contractors is better because they can pay them under the table. You might think that your housekeeper can charge less because they aren't paying taxes and instead can pocket 100% of what they earn. But there are actually some very significant benefits to filing taxes.
Your housekeeper will pay into benefits that they may need in the future, such as unemployment benefits. It also produces a verifiable work and income history which they can use for things like mortgages and auto loans - which is very important because they can't clean for you if they don't have a reliable car to get them to your home.
What forms do I need to file as an employer?
As an employer, you'll need to file the following forms: Form 944 annual federal tax return; Form 941 quarterly federal tax return; and Form 940 annual federal unemployment (FUTA) tax return. You'll also need an EIN.
What if my housekeeper also works for other families?
This is just like if you had two different jobs. Each employer would file employment forms, pay and withhold the correct taxes, and each employer would send you a W-2 for the work you performed throughout the year.
Should I hire an independent contractor or a cleaning service?
Independent contractors can be a great choice for many homes. You get to build a trusted relationship with one or two people. That trust will give you peace of mind and that feeling is priceless. That being said, just make sure you're doing it the right way to avoid an administrative headache or short-changing your housekeeper from benefits they may not know they will need.
We went back and forth a lot about whether to structure our cleaning company as a W-2 employer or to partner with independent contractors. We felt that it was better to hire our staff as W-2 employees because we could provide them with much better benefits. For example, paid sick leave.
Cleaning professionals list losing income due to illness as one of their top concerns. Independent contractors don't earn paid sick leave. When they can't work, that is money they don't earn. That incentivizes them to work while they are sick. Which can bring that illness into your home. We give our employees 2 weeks of paid sick leave so that they can stay home and rest without stressing out over lost income.
Whichever route you choose to go, remember that these professionals are doing a tough job. And they don't often get the dignity and security from their jobs as many other people do. So when you have the chance to make them feel a little better about their work, please do so. A little bit of compassion and appreciation will make your housekeeper feel valued.