We’ve talked about the difference between an employee and an independent contractor as it relates to household employment before. But we’ve always talked about how the IRS views nannies. Just as a reminder, Publication 926 specifically singles out nannies as household employees because the family is in control of the working relationship.
However, recently the Department of Labor weighed in on this same issue and gave their assessment of why someone would be an employee versus and independent contractor. There were six different areas they focused on, but two of them really stood out for nannies – economic dependence and permanence.
Permanence refers to the structure of the job. A nanny takes a job knowing they’ll work for the family indefinitely. The only way the job stops is if she quits on her own, or if the family lays her off or fires her. None of these scenarios are things that are expected when a nanny accepts the job. An independent contractor, on the other hand, is generally someone who is working short-term or for a defined period of time for a client and then moves on.
Economic dependence is exactly what it sounds like. A nanny would be considered an employee because they are economically dependent on the family for their financial well-being. This holds true for most nannies because they’re working for one family often enough where having a second job just isn’t feasible. An independent contractor would have numerous clients, so if one fell through, they wouldn’t be affected enough long-term for it to really matter. They could just go out and get another customer.
You may be asking yourself at this point, “doesn’t this just apply to full-time nannies? What about temporary nannies?” Remember, these two points are just part of the broader picture of what makes a nanny an employee. A nanny that knows up-front that she’s only working for 12 weeks during the summer is still probably financially dependent on that job. Or a nanny working part-time for two families is still working for those families indefinitely. And don’t forget that the family is most likely controlling how the job is done, the hours worked, days worked, etc. in both of these scenarios. That means the IRS would most likely view the nanny as employee just on that factor.
If you’d like to read more about the Department of Labor’s explanation on this topic, click here. It’s a long read, but interesting if you like to read about laws. At the end of the day, the thing to take away is that, in just about every instance, a nanny should be treated as an employee and receive a W-2 to file her taxes. Going the independent contractor route is illegal for the family, more expensive for the nanny (since she has to pay twice as much in Social Security & Medicare taxes), and robs her of benefits like unemployment insurance.
By Tom Breedlove, HomePay by Breedlove