Each year, families across the country unlawfully categorize their employee by providing a Form 1099 (Form 1099 is used to report money paid to an independent contractor). The IRS has ruled that household workers are employees of the family for whom they work; attempting to classify them as an independent contractor by giving them a Form 1099 is considered tax evasion and does not absolve them of their household employer tax and legal obligations.
Of all the errors we see, this one is at the top of the list. The confusion stems from the IRS 20-point test to determine worker status. Many of the questions are ambiguous and/or subjective. Worse, a worker may appear to be an independent contractor on some of the questions and an employee on others. Which answers are right?
If even one of the 20 answers points toward employee, she’s an employee. To save you the hassle of the test, the IRS has ruled definitively that household workers should be classified as employees. Therefore, the family must handle all household employer tax and labor law obligations. Tax breaks make it cheaper than you’d think and if you use our recommended nanny tax provider, it is effortless.
Note: The IRS views worker misclassification as tax evasion and recently announced a major expansion of auditors to augment their enforcement efforts in this particular area. As further warning, the household employment industry was cited as one of the primary targets.
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