As you set up your learning pod, it’s important to consider whether your teacher is an employee (W-2) of your household, or an independent contractor (1099). Employment classification varies based on the arrangement and state. More often than not, if it's a full time or near-full time role,they’ll be seen as an employee. This means you’ll need to consider payroll and workers compensation. We’ve broken it down by frequently asked questions in order to help you get started.
- Most full time or near-full time at-home private teachers (e.g., teachers leading learning pods) may be classified as employees, not contractors.
- Payroll services designed specifically for household employers (i.e., families) cost $500-1,000 per year and they handle everything. We can make introductions to recommended services for you.
- Tax credits are available if teachers are classified as employees. These tax credits likely offset most of the additional costs associated with payroll services and payroll taxes.
- Filing as a household employer provides benefits to the employee (e.g., unemployment benefits, social security) and, net after-tax credits, may not result in much additional expense. In fact, you may even come out ahead!
- If the teacher is classified as a full-time employee, workers compensation insurance is likely required by your state.
- Workers compensation insurance reduces ongoing liability (e.g., lost wages, medical expenses) associated with injuries suffered by your employee. Annual cost may range from $300-1,300.
Knowing the questions to ask, and which third party resources to use, will help you confidently walk this well-worn path. When all is said and done, the issues regarding payroll, taxes, and workers compensation will be fairly straightforward to resolve.
Should we classify our teacher as a contractor (1099) or an employee (W-2)?
Most likely, your full-time or near full-time learning pod teacher is an employee of yours, but it depends on the arrangement and state you reside in.
According to Nanny.org, the IRS has ruled definitively that most household workers are employees of the family for which they work. The difference between employees and independent contractors hinges on the amount of control one has over the worker, and a family directly hiring a teacher to work in their home may be deemed to have significant control over how the teacher performs their work. If the family controls work hours, the workplace, responsibilities, and work tools, the teacher is an employee and not an independent contractor.
Most states apply some form of a control test, where a teacher would be an employee if he or she is working at the control or direction of the family with little autonomy to choose working hours or the method of completing the work. If the teacher is working full time for one learning pod and/or is dependent on one pod for income, the teacher is also more likely to be an employee. It veers more toward an independent contractor relationship if the teacher is taking on more than one pod, designing curriculum, or otherwise in business for him or herself. That being said, some states have a strict test, where unless someone fits a set of factors exactly, he or she is an employee.
Pro Tip: An independent contractor has greater tax responsibility than an employee because they have to pay both the employee and employer taxes. If your circumstance allows you to classify your teacher as an independent contractor, be prepared to compensate them in order to help cover those costs.
Key Takeaway: The IRS generally views household workers to be employees. If you’d like a formal ruling, you can obtain one from the IRS by filling out Form SS-8. Also, consult an accountant or employment lawyer who is familiar with your state.
What are “Nanny Taxes”?
The “nanny tax,” according to Homepay, is a combination of federal and state tax requirements detailed in IRS Publication 926. It states the taxes families must manage when they hire a household employee, such as a nanny, senior caregiver, or, in the case of a learning pod, a teacher. The taxes include:
- Taxes withheld from the employee: Social Security and Medicare taxes (FICA), as well as federal and state income taxes.
- Taxes paid by the employer: Social Security and Medicare taxes, as well as federal and state unemployment insurance.
For tax year 2020, nanny taxes come into play when a family pays any household employee $2,200 or more in a calendar year (or $1,000 or more in a calendar quarter for unemployment insurance taxes). Keep in mind, your tax obligations will vary by state of residence.
What taxes should I pay as a household employer?
Household employers can expect to pay the following employment taxes:
- Share of Social Security and Medicare (7.65%)
- Federal and state unemployment insurance
These employer taxes are typically 10% above the employee’s gross payroll. Employers often qualify for favorable tax breaks that will largely offset their employer taxes.
What are the tax breaks I should receive as a household employer?
- Dependent Care Account. Most companies offer a type of flexible spending account (FSA) to their employees. This account allows employees with child or dependent care expenses to contribute up to $5,000 of their pretax earnings to an individual Dependent Care Account. The money in this account is then used to cover childcare expenses, free of taxes. The savings are approximately $2,300 per year.
- Child or Dependent Care Tax Credit. Those who don’t have access to a Dependent Care Account can claim the Tax Credit for Child or Dependent Care (Form 2441) on their income tax return at year-end. Basically, they can take a tax credit of 20-30% of qualifying childcare expenses. Only expenses up to $3,000 for one dependent, or up to $6,000 for two or more dependents can be counted.
These benefits are only available if the employee is paid legally. You may be able to take advantage of both tax credits. Most families, however, can only claim one of the two tax breaks, with the larger one being the Dependent Care Account.
What are the benefits of paying employment taxes?
Employer benefits: In some cases, savings from tax breaks exceed the employer’s share of taxes –- actually saving money by being legal. Hence, they have less to worry about if they are audited by the IRS or state.
- It also allows employers to offer a more attractive opportunity for employees. This may allow employers to earn years of service for social security and eligibility for unemployment benefits.
Teachers’ and caregivers’ benefits: Employees can claim Social Security income and Medicare coverage upon retirement.
- They may also get unemployment benefits if they lose their job due to no fault of their own.
- Additionally, employees get a verifiable employment history, necessary for obtaining auto and home.
- Finally, they may get reduced health care costs via subsidies provided through the Affordable Care Act.
What services are available to help us manage payroll?
There are a number of options that will take care of all payroll operations for a monthly fee. Total annual costs can range from $500-$1,000 per year. Contact us for recommended services.
What is workers compensation insurance?
Workers compensation insurance covers the financial risk and liability associated with work-related injuries or illnesses suffered by employees. Typically, claims cover the cost of the employee’s medical bills and lost wages while they’re out of work. Families generally pay an annual premium for coverage.
Pro Tip: While independent contractors are not generally eligible for workers compensation coverage, they may be misclassified by their employers. Remember to check, and re-check, whether your teacher is an employee or contractor.
What does this cost?
According to Homepay, annual expenses for a household employer of a teacher could range from $300-$1,300 depending on state and vendor.
Why is workers compensation insurance so important?
It’s legally required in most states. Non-compliance could result in fines. In the event of a workplace injury, families could be held liable for the amount of workers compensation benefits. This could mean the teacher's medical expenses and lost wages would come out of pocket from the household employer.
Employees who accept benefits generally are required to forfeit their right to sue the employer, regardless of fault.
Why wouldn’t my homeowners insurance cover my caregiver?
Consult your insurance representative. Homeowners insurance may cover some, but not all, of the liability associated with workplace injuries suffered by household employees. Homeowners insurance usually pays out a single claim, not ongoing payments such as medical expenses or lost wages. And finally, workers compensation is mandatory to be purchased by employers in most states.
Are household employers required to purchase a workers compensation policy?
Most states require families to have a workers compensation policy if they hire a caregiver to work in their home. View requirements in your state. Even if it weren’t mandated by the state, there are many reasons a household employer should obtain workers compensation insurance including reducing your potential liability.
Do I need workers compensation insurance if I have personal liability coverage under my homeowners or renters insurance?
While personal liability coverage may cover any initial claim, it would likely not cover ongoing claims (e.g., disability) that worker’s compensation coverage does. It’s also mandated by most states for employers.
Note: Because there are facts and circumstances unique to each learning pod, confirm all details with your legal, tax, or insurance advisor/provider. The information provided, in this article and anywhere on our site, is for general informational purposes. It is not, and is not intended to be, legal, accounting, tax, or employment advice.