If you own and run your own business, you probably employ people to take care of your business. Let’s say you also employ some others to clean your house, maintain the yard, babysit your children or take care of pets. Why not combine all of the above said employees on one payroll?
The short answer is that this comes down to a tax issue that could cause you a great deal of trouble.
Although it sounds easier and simpler to keep all your employees on your company payroll, it isn’t. Keeping your business expenses separate from your personal expenses is important in general, but it is actually illegal to include a household worker’s payroll in your company’s payroll tax reporting. The reason is this: the IRS does not consider domestic/household workers to be a direct contributor to the success of your business. When it comes time to report your payroll taxes, there is a separate household employment reporting process to follow. Following this process will also help you comply with the “nanny tax” that catches so many household employers unaware.
Like we always remind our clients, your business and personal expenses really do need to be kept separate, and your payroll tax and accounting will be easier. And what’s more, you’ll be compliant.
Helpful info for hiring household employees: When you are figuring out how and when to pay your household employees, you will first need to know the difference between an employee and an independent contractor (I have posted a 5-part series on employees vs independent contractors). When tax time comes around, misclassifying a 1099 worker is considered tax evasion, so for obvious reasons it’s best to be informed from the start. Knowing the difference at the time of hiring will also help you avoid pitfalls along the way (like issues surrounding overtime, which is regulated by the Fair Labor Standards Act). In addition to FLSA, a few states (including California) have adopted a Domestic Worker’s Bill of Rights. Employers should carefully consider these laws prior to hiring a domestic worker.
Have questions regarding payroll for your small business employees? Give us a call at 310-534-5577 and we will be happy to help!
