By Mark Chatow
Can my nanny be an independent contractor?
Hiring a nanny as an independent contractor may seem like an easy way to avoid payroll taxes and employee wage requirements. But to be properly classified as an independent contractor, rather than as an employee, a nanny must run their own business and have you pay them as a client of that business.
In addition to having a well-structured independent contractor agreement, you will need proof they have their own business license and insurance, and that they’re paying payroll taxes. They should also be working with other clients, able to hire assistants or others to help with their work (at their expense), supply their own “tools of the trade,” and be engaged with your family on a relatively short-term basis.
Ideally, you’d have a minimum notice requirement of 30 days to terminate the contract. An at-will agreement tends to point towards an employee-employer relationship.
Additionally, under the law, if you train a nanny or tell them how they should perform their duties other than an initial orientation and some general suggestions, they’re most likely an employee, not a contractor.
If all of that sounds onerous, you’re right. The IRS and government labor agencies are well aware that employers will call employees “contractors” to avoid taxes and wage requirements.
Miscategorizing your nanny as a contractor can open you up to tax liabilities, back pay, and substantial penalties.
What type of employment contract is needed?
If you decide that going the employee route is a better call, you’ll want to document the employment relationship with an employment agreement.
The agreement should, at the very least, cover the basics, including the duties to be performed, anticipated work hours, and pay.
Every state other than Montana allows you and your nanny to end your working relationship at will if you have not defined it otherwise. Be cautious when defining contract end dates. Putting anything regarding the length of an employment agreement into the contract can potentially turn the employment from at-will to a fixed period, and set you up for a wrongful termination case down the line.
Hourly pay or salary? What’s legal and what’s not?
Nannies are categorized as “non-exempt” employees, which means that you’ll be required to pay minimum wage, overtime, and provide meal and rest breaks, as required in your state.
Under Federal law, nannies who live outside the home in which they are working are entitled to be paid overtime for any hours beyond 40 hours in a week at 1.5 times their regular hourly wage. Nannies who live in your home are entitled to overtime at their regular hourly wage. Some states, including California, New York, and Maryland, calculate overtime at 1.5 times hourly wage for live-in nannies.
Overtime and minimum wage laws vary from state to state and may be more stringent than federal law. Check the laws for your state.
If you want to pay a flat salary, you should always classify it as an hourly wage plus an overtime wage in your contract with the nanny. For example, if you want a live-out nanny to work from 7:00 a.m. to 5 p.m. Monday through Friday, they would be working a total of 50 hours a week: 40 at regular pay and 10 at overtime rates. If their weekly pay was $660, you would classify it as 40 hours at $12 an hour ($480), plus 10 overtime hours at $18 an hour ($180), for a total of $660 a week.
How do you keep track of taxes, nanny information, and hours worked?
To comply with federal law, you must keep a record of 14 different pieces of information on an employee from name and birth date to days and hours worked. The law requires you to keep your summary payroll records for three years and the timesheets on which the records were based for two years. You can find a complete list of what you need to keep track of here: http://www.dol.gov/whd/regs/compliance/whdfs21.htm.
You’ll also have to track and pay all required payroll taxes. Failure to do so will expose you to liability for back taxes and penalties.
What about benefits?
The requirement to provide benefits to nannies can vary from location to location. In San Francisco, for example, workers must receive 9 paid sick days. If you are already offering paid vacation days, those count towards the requirement. This law applies specifically in the City of San Francisco, but not in adjacent cities, which illustrates how important it is to check with your city, county, and state to find the requirements in your area.
If you do provide vacation days, accrued vacation days are considered wages. They must be paid upon termination and penalties for failure to comply can be significant.
How do I end things?
When it comes time to end a nanny’s employment, start preparing as soon you see signs that things are not working out. Document any performance issues in writing, along with proof that you communicated those issues to the nanny. By creating a paper trail, you’ll make it easier if you ever need to fight a case for wrongful termination.