Making Your Money Last
Hiring a Caregiver Can Be Taxing
When you hire a care provider, you take on the role of employer -- taxes, insurance and all.
By Laura Cohn, Associate Editor, Kiplinger's Personal Finance
April 9, 2008
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EDITOR'S NOTE: This article was originally published in the December 2007 issue of Kiplinger's Retirement Report. To subscribe, click here.
When you hire a care provider for a spouse or parent, you can either go through an agency or strike out on your own. If you hire a caregiver yourself, you get to choose the person who you think will be the best fit for your family. One big downside: The paperwork can be overwhelming.
You've heard about the "nanny tax," the complicated rules that apply to parents who hire someone to care for their children. Well, the same tax rules apply if you're hiring someone to care for a spouse or parent. You have to verify the caregiver's legal status, and you'll probably pay Social Security and Medicare taxes for your employee, and unemployment taxes, too.
You'll also likely pay higher insurance costs. "You have to think like an employer," says Barbara Anderson, a lawyer at the Law Offices of Peter T. Straub, a law firm in Alexandria, Va.
A good place to start is the Household Employer's Tax Guide (Publication 926) at www.irs.gov. You'll find guidance on what taxes to pay, what forms to fill out and what records to keep when you become an employer.
If you pay your caregiver less than $1,500, you don't have to worry about taxes. (That threshold rises $100 in 2008, to $1,600.) Pay more, though, and you'll owe 15.3% of the wages as Social Security and Medicare taxes. The amount is supposed to be split evenly between you and your employee (7.65% each). But it's up to you to pay the full amount when you file your income-tax return for the year. Whether you withhold Social Security and Medicare taxes from your employee's paycheck is up to you. Most employers don't withhold -- and then regret it when they have to come up with the dough at tax time.
If you pay the worker $1,000 or more a quarter (in 2007 or 2008), you'll owe federal unemployment tax, typically 0.8% on the first $7,000. Contact your state tax authority to find out if you'll owe state unemployment tax, too. Ask the tax agency if you need to pay for worker's compensation and short-term disability insurance.
As an employer, it's up to you to make sure the caregiver is a legal immigrant. Have him or her fill out the U.S. Citizen and Immigration Services Form I-9, Employment Eligibility Verification.
Benefit From Tax Breaks
The good news: You can qualify for some tax breaks. If you're paying for care for a spouse or parent who can't take care of himself or herself -- and you have a job -- you can claim a tax credit worth 20% to 35% of the first $3,000 in cost. The IRS guide Child and Dependent Care Expenses (Publication 503) provides further details.
You may also be able to deduct the cost of in-home services as a medical expense. But, the expenses must exceed 7.5% of your adjusted gross income.
Beyond the tax implications, you need to check whether your homeowners insurance policy will cover the caregiver if an injury occurs. And if the care provider will be driving your car, make sure your auto policy covers that. "The responsible party has to be very careful to make sure all the risks are covered," says Robert Bullock, partner at the Elder & Disability Law Center, a law firm in Washington, D.C.
One way to avoid all the paperwork is to hire a caregiver through an agency, which handles the worker's taxes and insurance for you. Gail Quigley, 65, whose 85-year-old husband, John, has Alzheimer's disease, uses a caregiver from Bethesda, Md.–based Life Matters. "They handle all the tax stuff," she says. "And if the person doesn't show up, they get you a backup."
If you're determined to hire a caregiver on your own, it's a good idea to hire a tax adviser. Says Harry Wigler, a certified public accountant in Woodbury, N.Y.: "This is not a do-it-yourself project. You could end up being subject to penalties, interest or both."
Reader Comments (9)
Posted by: Kathleen Webb at 04/09/2008 02:05:40 PM
Be advised that the threshold that triggers a "Nanny Tax" obligation is indexed and changes periodically. The threshold is $1500 for tax year 2007 and rises to $1600 for 2008. Many families and accountants turn to boutique firms that specialize in the nanny taxes...for compliance help.
Posted by: Ed Rice at 04/09/2008 06:58:30 PM
I tried to hire a private caregiver for my mother who wanted to remain at home. The liability and headaches are just not worth it. Trust me there are plenty of agencies out there who do outstanding jobs and they take care of everything. One of the better one's I found was Home Instead Senior Care - they are nation-wide and do outstanding work...Find a good home health agency and ask to see their Legal Employer seal - you will be glad you did.
Posted by: Tom Breedlove at 04/09/2008 07:13:11 PM
Good article. Very informative and helpful. One other common issue that employers need to be aware of is overtime. Federal law states that employees who work more than 40 hours in a workweek must be paid at time-and-a-half for each hour over 40. If your employee is on a salary, make sure the employment agreement specifically details that the salary is comprised of 40 hours per week at $x per hour..There is no statute of limitations on overtime so a disgruntled former employee could file a wage dispute and it could cost a pretty penny. The good news is it's a landmine that's easy to avoid if you deal with it upfront.
Posted by: David Bayless at 04/10/2008 07:08:31 PM
Ed...You mentioned the Legal employer seal, where do I buy it?
Posted by: John Neff at 04/12/2008 10:32:50 AM
We contacted Comfort Keepers when my mom needed help in Newport Beach. They were excellent and mom loved her caregiver. Comfort Keepers actually hires the caregivers after background and reference checks and provides worker's compensation and other insurances. We were concerned because we had heard stories of thefts, lawsuits and other horrors involving other so-called agencies. We found them by contacting the Orange County Office on aging who have been an excellent resource all through mom's ailment. Highly recommended.
Posted by: Elly Smith at 04/14/2008 04:32:37 PM
There are plenty of agencies to choose from. I would recommend that anyone looking for care for a loved one select an agency with membership in the National Private Duty Association (NPDA). Agencies who are members of this organization certify that all caregivers have thorough background and reference checks, are employees not contract workers, are regularly supervised, and maintain liability and worker's compensation insurance. While the majority of Comfort Keepers franchises are members of this organization, it is also corporate policy to follow these guidelines.
Posted by: R.S. at 04/15/2008 04:53:49 PM
From our experience, go with a reputable agency. We hired local people and paid them using a payroll service and withholding for taxes. But the worst part was the attachment that Mother had with one of the caregivers, so much so that she eventually became so dependent on the person and was taken advantage of...The agency should provide a buffer for that, such as background checks. Also, have a nurse come in every week or two to check their nuitrition and hydration levels. Caregivers are not trained to notice that, until it is too late.
Posted by: Ed at 08/15/2008 08:31:13 PM
There are many things that you should take into account when hiring private caregivers....www.findinghomecare.com (has) caregivers NATIONWIDE available for work. Also, there are lots of other helpful parts like homecare listings by state and articles written by nurses
Posted by: rickc at 12/30/2008 02:32:09 PM
Can you be paid to serve as a primary caregiver for an elderly parent? I mean can you have that parent and other relatives pay for you to provide caregiver services which, in turn, you can claim as your job for tax purposes?