Part of the tax code rife with confusion involves household employees. These workers may be housekeepers, nannies, professional assistants, private nurses, senior caregivers, etc. In many cases, well-meaning individuals simply don’t realize a person working in their home is an employee. However, other people — often successful professionals who cross every “t” and dot every “i” in their day job — take a cavalier approach to the tax rules for those working in their employ. The following is a brief overview of the rules associated with these workers.

It’s not unusual for people to mistakenly treat household employees as independent contractors. In fact, these employees may even suggest that they be paid as “1099” employees, a reference to the 1099 tax form issued to independent contractors working for businesses. Part of the confusion stems from the wavy line in the sand the IRS has used to determine employee status. In the past, the IRS published a 20-Factor test — essentially 20 questions used to determine employee work status.

Today, the IRS has narrowed their guidance to focus on the degree of control and independence the worker has over their own labor. One key determinate is behavioral control. Does the employer have the right to control how and when the employee performs their job? If they do, then they are likely an employee.

Consider the following examples. Mike owns his own business performing lawn services for dozens of customers. Wendy, a successful businesswoman who also owns several rental properties in town, hires Mike to mow at her rental properties as well as at her own home. They agree that Mike will mow roughly every 10 days. In this case, while Mike and Wendy agree on the scope of the work, how and when Mike does the work is up to him. He purchases his own equipment to use and ultimately determines when the properties will be mowed. As such, Mike is likely operating as an independent contractor.

Angie also works for Wendy as her part-time personal assistant. Wendy hired Angie to work from 8 a.m. until 2 p.m. every Friday. Angie sorts Wendy’s mail, makes various phone calls for her, and runs errands as directed by Wendy. In this case, Angie is almost certainly an employee of Wendy. She regularly directs when Angie works, the tasks she is to complete, and how she is to complete them.

Why does it matter? Assuming Angie is paid at least $2,100 during the year, Wendy would be responsible for withholding income taxes and paying Medicare and Social Security taxes. If Angie is paid $1,000 or more in any calendar quarter, Wendy is also responsible for paying Federal unemployment taxes on Angie’s wages. However, Wendy would not be responsible for withholdings or paying any taxes for Mike who is working as an independent contractor.

Not long ago, a good friend inquired about the process of hiring a nanny for a couple of days a week to help with their three kids (he knew we had done so for our youngest son). After going over some pointers, he was surprised to learn that they would be responsible for withholding Social Security taxes, paying unemployment tax, and withholding income taxes. “Even if it’s just a couple of days a week?” he queried. “Yes,” I informed him, “unless you want to risk felony tax evasion over a few hundred dollars in taxes.”

A study released in 2018 estimated that the compliance rate for paying household employment taxes was just over 5 percent. When employees are paid “under the table,” they may be deprived of future Social Security, Medicare, or unemployment benefits they would otherwise be entitled to receive. Considering about 92 percent of household employees are females often struggling to make ends meet, paying appropriate employment taxes becomes not just a legal requirement but a moral obligation as well.

Wages paid to a spouse, your child under the age of 21, or an employee under the age of 18, are generally exempt from employment taxes. Otherwise, individuals should consider using services such as nannychex.com, myhomepay.com, or a local payroll service in order to streamline the administrative burden of a household employee. They will make the process easy and you won’t find yourself in the position of trying to explain to an IRS agent that “everyone else does it,” so it must be OK.

Tim Sullivan is the owner of Clarity Financial LLC, a fee-only advisory firm in Columbia, a CFP practitioner and member of the National Association of Personal Financial Advisors and has earned the Enrolled Agent designation from the IRS.