H i g h e r E d u c a t i o n

Hiring Household Employees:An ever increasing need

but not without accompanying regulatory requirements

James R. Hanna, CPA, CVA

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Today, families are faced with an increased need to hire nannies, gardeners, maids, executive chefs, house cleaners and private nurses to help to run their households. Those responsible for hiring household employees need to be aware of important, pertinent considerations, to include regulatory requirements, in order to minimize present and future complications.

Sometimes, hiring decisions are based on friendly recommendations of well-meaning friends or neighbors, accompanied by stellar opinions on the worker’s honesty, work ethic, and their very reasonable charges for household services. Accepting such references as the total basis for making a hiring decision can be deceptively risky, resulting in problems which may surface well after the worker has been hired, or, even more seriously, after his/her termination.

Before you hire Prior to extending an offer of employment, one should begin by seeking guidance on budgeting all costs involved in engaging household help. Attentiveness to periodically changing regulatory requirements and related costs for household help, mandates securing answers to questions such as:

■ Is the candidate a United States citizen or a properly documented resident alien, eligible to work in the United States?

■ Has an acceptable background check clearance been obtained with respect to legal matters?

■ Is the candidate insurable for liability and worker’s compensation?

■ Are compensation arrangements and IRS reporting requirements clearly understood?

Additionally, the following topics will need to be properly addressed: ■ Complying with federal and state minimum

wage requirements; ■ Maintaining required records for the

household worker’s labor hours worked; ■ Filing quarterly, and year-end tax reporting,

for the worker(s) and the employer; ■ Procuring insurance protection for the

employer and the worker; ■ Optimizing income tax planning for the

employer to avoid losing valuable tax credits available in the case of child care; and

■ Reducing all terms and conditions in a letter agreement to be signed by all parties.

Background Check A background check conducted by an independent, reputable, specialty firm is essential for any stranger who is permitted access to one’s home. Customarily, household workers are trusted without question, and have free range of most, if not all, of the rooms in the home. Under the auspices of allowing household cleaners to perform the required tasks, or permitting maids and private nurses to be of maximum service, unlimited access, premise-wide, is typically permitted. However, this can result in exposure to mail, valuable papers, personal possessions, family heirlooms, and even inadvertent divulgence of information believed to be secure on a home computer.

In the case of hiring a nanny, most parents are diligent about conducting a background check. However, investigating the integrity of the firm

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conducting the independent background search is imperative, since the well-being of the entire family is at stake, as amply illustrated by the following vignette.

Mount Desert Island, Gladwyne and Palm Beach Reality A young professional with a family of four needed live-in help for an aging grandfather. The live-in was required to have a flexible schedule in order to travel between multiple homes every few months. In order to find a trustworthy household employee, the family retained a local recruiting firm to help with their search. After many interviews, the family found a match for the grandfather’s needs. The recruiting firm provided the family with a satisfactory background check report, and the employee, “Felicity,” moved into the grandfather’s three homes.

Unbeknownst to the family, the background report provided by the recruiting firm had been fabricated – “made up” without any foundation! After a few weeks, when Felicity had settled into her position, she began to intercept the grandfather’s mail and completed pre-approved credit card applications in the grandfather’s name.

For months, she perpetrated a fraudulent credit card scheme, borrowing money for herself, from credit card companies in the name of the grandfather, in amounts just below limits sufficient to escape detection. Once the fraud was discovered, the family hired an attorney and suffered not only losses from the fraud but significant expenses to restore the grandfather’s credit.

Record and Time Keeping Compensation that is paid in cash, in the absence of proper reporting, presents a minefield of potential problems. Complications can extend from the current inability to procure proper liability

and worker’s compensation insurance due to improperly maintained payroll records to unexpected claims for social security benefits, traceable back to an employment relationship of some earlier era when cash was paid but no withholding funds were remitted to the social security fund. Some individuals may try to sidestep the entire question of employment taxes, attempting to establish an independent contractor relationship, as opposed to an employment relationship. Please beware - although the difference between the two may appear subtle, the IRS has established very clear, well established guidelines.

Finally, a clear definition of work expectations and compensation must be understood by all parties. For example, depending on the level of payroll funding, an employer who provides room and board as part of overall compensation, may inadvertently fail to meet minimum wage requirements even though the combined value of room, board and the dollar payments far exceed the minimum wage requirement.

When engaging household help, exposure to risk arises right from the beginning of the hiring process, continues as long as services are being provided, and often extends well beyond termination of the relationship.

SMART DEVINE provides the specialized guidance needed to eliminate unpleasant surprises and ensure manifold employment hurdles are addressed. Beginning with legal formalities to include citizenship documentation and adoption of appropriate employment, payroll and income tax practices, we can assist in controlling the risks associated with having household help working within one’s home. As a result, peace of mind is attained by establishing a harmonious, legal working relationship with the prospective household employee right from the very outset of service arrangements.

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About the Author James R. Hanna, CPA, CVA Managing Director

With over 40 year’s public accounting experience, Jim has the versatility to provide long-term strategic planning solutions for owners of closely-held businesses as well as to provide critically important lifetime financial planning solutions for individuals. His vast range of business experience spans individual income tax planning, business valuation, complex estate and trust planning, and forensic investigations.

Suitable as an advisor for every life cycle stage, whether in the course of business entity selection, merger guidance, succession planning, or sale of an entity, Jim provides solutions that are directed towards growth, accumulation and protection of wealth, with preservation achieved using an independent watchdog protection protocol.

Jim is a graduate of Georgetown University where he earned his Bachelors of Science in Business Administration. He is a Certified Valuation Analyst and a member of the National Association of Certified Valuation Analysts, the American Institute of Certified Public Accountants and the Pennsylvania Institute of Certified Public Accountants. As President of the Dad Vail Regatta Organizing Committee, Jim oversees staging the largest annual collegiate rowing regatta in North America.

For more information contact Jim at 267.670.7450 or email at jhanna@smartdevine.com.

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James R. Hanna, CPA, CVA Managing Director