“Everyone I dealt with at HomeWork Solutions was courteous and helpful, and I was given an immediate answer to every question. It is obvious to me that when it comes to household payroll taxes, working with a specialist is the only way to go.”
Our client, Linda M. came to us when her relationship with her husband’s caregiver was in crisis over taxes. Linda’s husband has dementia and needed supervision during the day. Linda lives in New Jersey and she hired the caregiver in the fall and was paying her in cash every week. An accountant handles the couple’s income taxes, and when she hired the home care aide her accountant told her that everyone treats these workers as independent contractors.
Linda is the first to admit that she doesn’t understand taxes, and prefers not to deal with them. In her circle of friends, all the families pay cash to their housekeepers. After checking with her accountant, she felt very comfortable with her arrangement.
In January, Linda’s accountant helped her prepare a 1099 form to give the caregiver, and that is where the trouble began. The caregiver went to a free tax clinic run by the IRS’ Volunteer Income Tax Assistance program. After chatting with the volunteer about her job, the tax preparer advised the woman that her employer had likely misclassified her as an independent contractor, and that IRS guidance states that home care workers are employees and should receive a W-2 form. Moreover, the volunteer preparer showed the caregiver that the misclassification would cause her to owe an additional $2300 on her income tax return.
The volunteer tax preparer was absolutely correct. Senior caregivers paid directly by the family are employees and should receive a Form W-2 at the end of the year.
Linda was confused about the distinction between an employee and an independent contractor. She did some internet research and then contacted her accountant. Her accountant explained again that everyone calls their housekeepers and senior caregivers an independent contractor, even though they really are employees.” No one wants to deal with the nanny taxes” he explained, “but if you do I suggest you talk to HomeWork Solutions.” Linda called HomeWork Solutions and received a quick education on why this was important and what her employer responsibilities were. HWS explained that the distinction between employees and contractors is important because employers of household employees such as housekeepers and senior caregivers file and pay employment taxes. Contractors handle their own tax filings. Linda’s accountant had steered her wrong, and there was some catch up Linda needed to do to straighten things out.
It was fortunate that the caregiver had only worked for them for a short time. HWS helped Linda to understand what taxes Linda needed to pay. Linda engaged HWS to help her get caught up on the taxes, and signed up for HWS’ payroll services so this could be done effortlessly going forward. Linda agreed to pay her employee’s portion of the Social Security and Medicare taxes – an option available to household employers. Linda convinced the caregiver to allow HWS to do paycheck deductions for her income taxes to help her avoid the stress of a large tax bill in the spring.
Since she began working with HomeWork Solutions, Linda has not had a single problem and she credits this with providing her a sense of relief when tax time comes around. Linda’s caregiver is delighted with her direct-deposit payroll, a convenience she has never had before providing private care.
July 2015 Senior Caregiver Independent Contractor Update
On July 15, DOL Administrator David Weil issued an Administrator’s Interpretation that said “most workers [who are classified as independent contractors] are employees under the FLSA’s broad definitions.” This clarification by the government put the final nails in the coffin of the independent contractor myth.
According to attorney Cynthia Effinger of McBrayer, McGinnis, Leslie & Kirkland, PLLC, "The defining question in this calculus is whether the worker is truly in a separate business that is independent economically from the employer. If the worker is economically dependent on the employer, the worker is an employee in the DOL’s eyes."
Read her full opinion...
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Independent Contractor Decision Resources
US Department of Labor: Employee or Independent Contractor?
The freelance economy is becoming more and more important every year. By 2020, 50% of America’s workforce will be freelancing on a part-time or full-time basis. Many industries are starting to take advantage of this economy because freelancers, legally known as independent contractors, are often times less expensive than regular employees. As a manufacturer, you might be tempted to hire an independent contractor, send them your patterns and materials, and ask them to sew clothing for you from their own home. For freelancers, working from home offers the advantage of flexible schedules, low cost business startup costs as well as a more easily-reached work-life balance. However, the garment industry is heavily regulated because of the various risks involved, particularly in regards to health and safety. It is very important to get informed on the different legal aspects surrounding the hiring of an independent contractor. Ultimately, whether or not you can do so boils down to two questions: can you hire a homeworker to sew clothing for you? If so, is that homeworker an independent contractor?
What kind of clothes do you want to be manufacturing and where?
The Fair Labor Standards Act prohibits the manufacturing of women’s apparel at home. In some states, such as California, it is strictly illegal to distribute garment industry work directly to homeworkers. That includes hiring someone to make, prepare, alter, repair, or finish any articles of wearing apparel – in whole or part- at home. This applies to all garments, made either by hand or by machine, using any material (California Labor Code § 2651). Task Force Investigators will seize any garments made from home and as well as all materials distributed to homeworkers by the employer.
Of course, every state has its own regulations. For instance, New Jersey prohibits the manufacturing of both men and women’s apparel while Pennsylvania and West Virginia, on the other hand, do not include garments on their list of prohibited industrial homework. It is therefore strongly advised to contact an attorney to verify the different laws and regulations in your state.
Do you have the required certification to hire a homeworker?
In order to be able to hire a homeworker to sew clothing for you, you will need certification from the Department of Labor. As mentioned previously, the manufacturing of women’s apparel, including children’s apparel, is strictly prohibited so no employer certification can be issued for that industry. It is however available for men’s apparel and other garments. Once you obtain the certificate, you will need to renew it every two years. Keep in mind that the federal certification might not always be enough and that some states do require you to get an additional state certification.
Will your homeworker be an independent contractor?
According to the U.S. Department of Labor, one of the most typical problems encountered is employers wrongly classifying homeworkers as independent contractors when they are not. Having an individual sign an independent contractor contract and do work from their own home for you is not enough to give them that title. In fact, if a substantial control is exercised over the work – for instance, if you supply the material, the patterns, give specifications regarding the items to be made and are able to reject any garments that do not meet your standards -, the homeworker will be considered a statutory employee under the Internal Revenue Code as opposed to an independent contractor.
As an employer, you must withhold FICA taxes (social security and Medicare taxes) from the wages given to your homeworkers if three conditions are met: 1) the contract of service contemplates that substantially all the services to which the contract relates in the particular designated occupation are to be performed personally by such individual, 2) the individual has no substantial investment in the facilities used in connection with the performance of the services, and 3) such services are part of a continuing relationship with the person for whom the services are performed and are not in the nature of a single transaction (Internal Revenue Code § 31.3121(d)-1). As mentioned previously, claiming that someone is an independent contractor will not be enough to absolve you, as an employer, from your obligations. The misclassification of employees as independent contractors is a real concern. Doing so will lead to both state and federal penalties. In California, they amount to fines between $5000 and $15 000 per violation, the repayment of back payroll taxes and a 10% penalty on unpaid taxes (California Labor Code § 226.8).
Here are a few tips to help you comply to the different laws and regulations related to the hiring of a garment homeworker as an independent contractor:
- Give creative control. Let your homeworkers pick out fabrics, make designs for you and give them the freedom to use whatever equipment they deem appropriate to create your garments. Substantial control over the work is the main characteristic of an employer-employee relationship. The more control your homeworkers have, the more likely they will be considered independent contractors. If possible, opt for compensating them for the fabrics, threads, yarn and other materials they will need to do the work instead of providing them directly to your freelancer.
- Find someone who is working or attempting to work with several designers, not just you. Ask your potential freelancer if they have any other on-going projects or work planned for the future. By doing so, you are making sure that the bulk of their revenue does not come from you, a single employer, therefore establishing more clearly that the homeworker you are working with is not your employee.
- Hire an attorney to consult with to draft a freelancer agreement. Having a properly written independent contractor agreement is essential. It will not only show the IRS that your homeworker and you agree to having a freelancer-employer relationship (as long as you do not treat your independent contractor as an employee), but will also clear any misunderstandings between your freelancers and you, especially in regards to the withholding of FICA taxes.
- If you are unsure as to whether or not your homeworker is an independent contractor, contact the IRS. If you are still worried about misclassification, you may submit an SS-8 form to the IRS in order for them to determine the status of the individual you are working with. The California Employment Development Department (EDD) also has a similar form. After submission, the EDD will let you know if you need to withhold state employment taxes.
- Check federal and state regulations regarding the manufacturing of garments. With the help of an attorney, verify that the garments you want, aside from women’s and children’s apparel, can be made from home in your state. Your lawyer will also guide you through the different steps required to obtain the necessary employer certifications from the Department of Labor and other state agencies to hire garment industry homeworkers.
As always, this article is simply informational and should not be read as legal advice. If you have questions regarding this blog post or would like more information on hiring homeworkers for your apparel business, you may email firstname.lastname@example.org.