A client asked me the other day about the accounting rules one needs to use for Washington State household employees and independent contractors.
This is a great topic.
So I thought it’d make sense to briefly outline the rules and then point readers to some resources they can use if they need more information.
Employee versus Independent Contractor
A first comment: The rules for determining whether someone is an employee or an independent contractor work the same way for households as they do for small businesses.
As a practical matter, then, it’s often pretty easy to determine whether someone is an employee.
Do you pay someone by the hour or day or week? Do you control how they do their work? Do you provide them with the tools and supplies required to do their job? Are you, in short, acting like an employer?
If you answer these questions, “yes,” you’re an employer and you need to follow the rules for employers.
And just to make this clear, if a household worker is an employee, you need to follow all the IRS rules and all Washington state employment rules.
This means, among other things, that you need to make sure the person is legally able to work in the United States by completing the I-9 paperwork (instructions here.)
You also need to calculate and withhold both federal and state income and payroll taxes.
And you need to remit those taxes and file federal and state payroll tax returns.
Note: The IRS provides a pretty detailed rules with examples here about household employees.
And one other wrinkle: Unfortunately, the IRS and the two state agencies who care about whether or not someone is an employee (Employment Security Department and Department of Labor and Industries) don’t all use exactly the same definition. (The definitions are similar… but not identical.)
Note: The Department of Labor and Industries provides a good worksheet you can use to determine whether someone is an employee as per Washington State law here.
State Unemployment Taxes for Household Employees:
Washington State requires household employers to pay and report on unemployment taxes.
There is an exception, however: If you pay less than $1000 a quarter for all four quarters of the year, you don’t have to pay unemployment taxes. For example, paying the neighbor kid to babysit probably falls into this “too little to worry about” category, for example.
If you do need to setup an employer account with the state, use the instructions provided at this page.
And a caution: You want to be careful about handling the state payroll taxes stuff. The penalties are pretty severe and add up quickly if you bungle this step.
Labor and Industries (Workers Compensation) for Household Employees
Washington state doesn’t require you to provide workers compensation to household employees if your headcount is fewer than two full-time employees and the employee either performs domestic work (like housekeeping and childcare) or the person performs gardening, maintenance, and similar work on your house or yard.
Though note this: Someone doing construction or home improvement is not doing maintenance. You would need to cover them with workers compensation insurance.
Tip: Washington State’s Department of Labor and Industries provides an excellent guide to the rules here.
Independent Contractors and Households
If you’ve worked in business, you may know that outside contractors and self-employed consultants require special accounting.
Specifically, if you pay an unincorporated business, including a self-employed individual, more than $600 a year, you need to issue them a 1099 that specifies the total paid. And you then need to send a copy of the 1099 to the Internal Revenue Service so the IRS knows how much the person received.
Fortunately, you do not need to issue a 1099 for household vendors. The IRS instructions for completing the 1099 forms, for example, specifically say this:
… Report on Form 1099-MISC only when payments are made in the course of your trade or business. Personal payments are not reportable.
A Final Comment
Hey listen, I get as frustrated as anybody with the red tape and paperwork required by well-meaning government agencies. But that complaint made, you and I really do want to either arrange domestic help so the person is not an employee… or we want to comply with the relevant federal and state laws.
The reasons are twofold: First, complying with the laws isn’t that difficult. Second, you and I will actually be doing the worker or workers a big favor by following the rules since the rules not only provide them with benefits like unemployment and on-the-job accident insurance, but the rules also keep domestic workers from getting into the tax troubles that pop up if an employer doesn’t handle the payroll taxes right.
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