Our friends at GTM have posted this update to a hot topic in Household Employment payroll. Check it out.
The U.S. Department of Labor (DOL) recently released a final rule, effective March 11, 2024, revising the agency’s guidance on how to analyze who is an employee or independent contractor under the Fair Labor Standards Act (FLSA).
This final rule is designed to reduce the risk of employees being misclassified as independent contractors, which can be an issue for families with household help, while providing a consistent approach for employers that engage with individuals who are in business for themselves.
Here’s what this all means for household employers.
Misclassification of household workers
While the IRS considers household workers to be employees and not independent contractors, the DOL provides further clarification for household employers.
Independent contractors are workers who, as a matter of economic reality, are in business for themselves, whereas FLSA-covered employees are workers who are, as a matter of economic reality, economically dependent on the employer for work.
Economic dependence doesn’t focus on the amount of income the worker earns or whether the worker has other sources of income.
For more on misclassification, check out Why You Shouldn’t Give Your Nanny a 1099.
Why misclassification is costly
Misclassifying a household worker as an independent contractor is considered tax evasion and is one of the biggest (and costliest) mistakes a family can make when hiring domestic help.
When considering their worker to be an independent contractor, a household employer avoids paying Social Security and Medicare (FICA) and unemployment taxes and is not required to obtain workers’ compensation coverage. Their employee may miss out on other benefits like domestic worker protections and state-mandated paid leave.
Misclassification can result in the payment of back taxes, interest, and additional fines, which can easily run into thousands of dollars.
The IRS, DOL, and state tax agencies have partnered to share information between agencies to help reduce worker misclassification and facilitate enforcement of the law.
Also, the IRS has no statute of limitations when auditing false or fraudulent returns, which would include employee misclassification, and collecting back taxes.
Under the FLSA, household employees are entitled to minimum wage, overtime pay, domestic worker protections, and other benefits. Independent contractors are not always entitled to these protections.
Read the full article here: US DOL Issues Final Rule on Classifying Independent Contractors