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Is anyone versed in the legalese that helps us understand per the IRS whether a DMM is required to be treated as a household employee and paid only via payroll and issued a W2 at year end versus being paid gross billings and reported on a 1099 at year end?
Is part of it the legal entity we used to form our businesses? (i.e LLC vs Corp)I brought this up because I was doing some research on the cost of setting up household payroll for a non-agency senior caregiver working in the home. As an aside, MA where the work happens is in the process of passing legislation to create new rules regarding the requirements to even withhold taxes from 1099 contractors.
I was on Care.com/homepay and saw this quote which frightened me, and it occurred to me to ask the forum.
“When a family hires someone to perform duties in or around their home, they are considered a household employer. The IRS views the worker whether a nanny, health aide, housekeeper, senior caregiver, gardener, chef, personal assistant, estate manager, etc. as an employee of the family in nearly every case. Misclassifying an employee as an independent contractor (using Form 1099) is considered tax evasion, so please call us if you’re not sure how to classify your worker.”Based on this wording, a DMM seems to me like a similar example and would require to be paid via payroll.
I assume there are no DMMs being paid as employees, so for my own knowledge, I want to know how what we use as legal justification for being classified as 1099.
Thanks!
The IRS always views this as a facts and circumstances issue. The IRS (and most state agencies) look at a variety of things. The current IRS guidance lists three issues to look at: Behavioral Control, Financial Control, and Type of Relationship. They used to have like a 20 question “”test”” but now have these three broader categories into which the potential employer must investigate. Here are some examples of questions to ask:
- Behavioral control: Does the employer provide training? Is the DMM already an expert in the field? Who dictates when the DMM works? (Not just the face-to-face meetings, but also the off-site work) Who provides the equipment (i.e. the computer) to do the work?
- Financial Control: Who dictates the price and billing method? Does the DMM have a significant “”investment”” in tools, equipment, training, licensing, etc? Does the DMM issue invoices? Does the DMM work for multiple people and offer their services to the public? Does the DMM have the opportunity to change the work arrangement in order to increase their profit (i.e. by changing software, not always buying the latest computer, not accepting clients clear across town, etc)?
- Type of Relationship: Does the DMM have engagement letters or employment agreements? How permanent is the relationship with a particular client? Is this one client of many or is one client the primary source of income for this DMM?
I found one IRS Quote: “”The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”” So, in general, I would say that DMMs are Independent Contractors and not Household Employees. In general, the DMM is going to pick the software to use to monitor budgets, they have their own computers (which they have picked), they generally work for multiple clients and offer their services to the public, etc. The only thing that would make them a “”household”” employee is that they go to the clients’ house to consult, pick up mail, etc. <br>
Now that is not to say that there aren’t some DMMs that shouldn’t be classified as independent contractors (or is that a double-negative). But other than those DMMs who work for family members (who would not be household employees for other reasons), I haven’t run across any DMMs who I believe should be classified as household employees.<br>
By the way, I’m glad you are thinking about this. I am an Enrolled Agent, and Independent Contractor vs. Employee is a topic at almost every tax conference that I go to. So, this is a complicated subject even for tax professionals.Yes, and it may be hard to prove you are a 1099 if you are just starting out and have only one client, especially if you have not formed an LLC or other type of corporation. My question is, are clients required to issue 1099’s for DMM providers if we are LLC’s and meet all of the above ‘control’ standards? My understanding was no, in the same vein as if someone put a new roof on your house you would not send them a 1099 for it!
A bit ironic… if my clients have to 1099 me, I will be sending them to myself!
Most DMM clients are not required to issue a 1099-misc because the clients aren’t paying you as part of their business. Businesses are required to issue 1099’s (for instance if a BUSINESS hired a DMM to pay their bills, then the DMM should be receiving a 1099). However, the majority of our clients are individuals and we are helping with their personal bills – so no 1099-misc is required.
Using Janis’ example of a roofer – an individual homeowner would not issue a 1099-misc to a roofing company. However, if a taxpayer had a rental property, and the roofer put a new roof on that rental property, then the taxpayer is actually supposed to 1) request the tax ID from the roofing company, and 2) if the roofer is not incorporated (S-Corporation or C-Corporation) then the taxpayer is supposed to issue a 1099-misc to the roofer. Note: Just because someone has an LLC, does not automatically mean that the business shouldn’t be receiving a 1099-misc.
I’d like to try to summarize or simplify this:
You bill the client with an invoice after performing agreed services, then you report that income on your Schedule C in your personal tax return (assuming sole proprietor or single member LLC is your business entity). The client does not have to issue a 1099-Misc to you at all. They just have to pay that bill! lolYou bill the Client with an invoice after performing agreed services, but this client is a business entity. (Such as Ryan’s Rentals, Help for Seniors, Granny’s Keepers, Client’s Name LLC, or whatever business name they have) Then you will receive a 1099-Misc from this business entity at the end of the year which will be reported on your Schedule C in your personal tax return. How do you know if they are a business entity? You ask. Do they have income that is reported on a Schedule C? Will your services be assisting this business or Will you be working for this business? Some clients “think” that they protect themselves from liability issues if they form an LLC to pay the household nanny or housekeeper. So you need to ask. Am I working for you/client? or Am I working for your business entity?
Your client hires you to come to the house and perform agreed services, and intends on paying you a payroll check with their EIN number they received, withholding FICA/Medicare taxes, then you will receive a W2 from that client and your report that just like any other W2.
It’s not always this simple, but generally, this should be a pretty good starting point. When in doubt, always ask and give the details of that situation.
Lisa Cooley
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