I just ran across an interesting post about hiring a housekeeper over at GetRichSlowly. In the comments, a reader asked JD about how they handle the tax issues. His response was:
Our housekeeper is not our employee; she is an independent contractor. Because of this, taxes arenâ€™t an issue.
This is a convenient answer, but is it true? It’s clearly beneficial from a tax perspective to hire your housekeeper as independent contractor vs. an employee, but just because you claim they are an independent contractor doesn’t necessarily make it true.
According to the IRS:
To determine whether a worker is an independent contractor or an employee under common law, you must examine the relationship between the worker and the business. All evidence of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories â€“ Behavioral Control, Financial Control, and the Relationship of the Parties.
While I’m not a tax expert, it seems likely to me that JD’s going to run into trouble with the Behavioral Control aspect, where the IRS is interested in whether or not the employer “has a right to direct or control how the work is done, through instructions, training, or other means.” I’m guessing that JD and his wife do exert some level of control over the work being done.
As further evidence that the IRS frowns on treating a housekeeper as an independent contractor, check out IRS Tax Topic 756, where it states:
Household employees include housekeepers, maids, baby-sitters, gardeners, and others who work in or around your private residence as your employees. Repairmen, plumbers, contractors, and other business people who work for you as independent contractors, are not your employees. Household workers are your employees if you can control not only the work they do but how they do it.
Also note that the IRS has ruled in the past that the employee/contractor issue is dependent on the nature of the relationship, and not the existence of a contract stating that someone is an independent contractor. Again, just because you say someone is a contractor doesn’t mean that it’s true.
Now… As I noted above, I’m not a tax expert, so perhaps my interpretations are wrong. As always, please feel free to chime in by leaving a comment if you have anything to share.