Academic journal article Journal of Accountancy

In-Home Caregivers: Answers to Tax and Nontax Questions; as It Becomes Increasingly Common for People to Employ Caregivers in Their Homes, It's Important to Ensure That All Laws Are Followed, from Tax to Immigration to Labor

Academic journal article Journal of Accountancy

In-Home Caregivers: Answers to Tax and Nontax Questions; as It Becomes Increasingly Common for People to Employ Caregivers in Their Homes, It's Important to Ensure That All Laws Are Followed, from Tax to Immigration to Labor

Article excerpt

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About half of all American adults in their 40s and 50s are part of the "sandwich generation"; they have at least one parent who is 65 or older, and they're also raising a young child or financially supporting a grown child (Pew Research Center, "The Sandwich Generation: Rising Financial Burdens for Middle-Aged Americans," available at tinyurl.com/jtkhngn). These individuals face considerable pressure to balance the need to care for a multigenerational family with the obligation to earn a decent living. To manage these competing demands, many people are hiring in-home caregivers to help care for family members. As Baby Boomers continue to age and require more assistance, this need will likely grow. Not surprisingly, the U.S. Bureau of Labor Statistics (BLS) projects a 38% increase in employment in the home health and personal care sector in the coming decade (BLS, U.S. Department of Labor (DOL), Occupational Outlook Handbook, 2016-17 Edition, Home Health Aides, available at tinyurl.com/nkjw74t).

Hiring a caregiver can be overwhelming. Amid dealing with the emotional and financial aspects of this task, many families overlook the tax and reporting obligations. When these oversights are discovered, the consequences can tarnish the reputations and diminish the finances of otherwise honest people. To help make the process of hiring a caregiver less burdensome, this article answers the tax and nontax questions that come up when a family hires someone to help in the home.

IS THE CAREGIVER AN EMPLOYEE?

The first question that must be answered is whether the caregiver is an "employee." The answer to this question will govern the reporting requirements for the caregiver. As with almost all things involving tax, this question is not simple because the law requires an evaluation of the facts and circumstances surrounding the family/caregiver relationship.

In the summer of 2015, the DOL issued new guidance on employee classification (Administrator's Interpretation No. 2015-1) based on an economic reality test founded upon both the Fair Labor Standards Act's (FLSA's) definition of the word "employ" and decisions from the Supreme Court and Circuit Courts of Appeals (see, e.g., Alamo Foundation, 471 U.S. 290 (1985), and Aimable v. Long and Scott Farms, 20 F.3d 434 (11th Cir. 1994)). Relying on the guidance provided by the FLSA and these cases, the DOL's multifactor test generally examines:

(A) the extent to which the work performed is an integral part of the employer's business; (B) the worker's opportunity for profit or loss depending on his or her managerial skill; (C) the extent of the relative investments of the employer and the worker; (D) whether the work performed requires special skills and initiative; (E) the permanency of the relationship; and (F) the degree of control exercised or retained by the employer. [Administrator's Interpretation No. 2015-1]

The DOL's memorandum is clear that the determination of the employment relationship is qualitative, not quantitative. As a result, the totality of the circumstances surrounding the relationship between the two parties is important.

In addition to the DOL's economic reality test, Internal Revenue Code Sec. 3121(d)(2) defines an "employee" as a person who is an employee under the common law rules for determining the employer-employee relationship. Regs. Sec. 31.3121(d)-l(c)(2) explains that this relationship exists when the person for whom services are performed has the right to control the actions of the person performing the services, determining not only which services are performed but also how. Rev. Rul. 87-41 provides detailed guidance by identifying 20 factors that describe the level of control, which indicates employment status. IRS Publication 15-A, Employer's Supplemental Tax Guide, distills this into three areas to consider in determining whether a caregiver is an employee. …

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