- Part I: Employee vs. Independent Contractor
- Part II: Paying and Reporting for a Caregiver Employee
- Part II: Paying and Reporting for an Independent Contractor Caregiver
The decision to hire a caregiver for your loved one is often a long and winding road. But once the decision has is made, there is still more work to be done to hire, train and pay the caregiver properly. The process of hiring and training are important but separate discussions. In this important article, we tackle one of the more tedious but necessary parts of adding this essential person to your care team: how to determine if a caregiver is an employee or independent contractor.
One of the advantages to hiring a caregiver through a home-care or other staffing agency is that the agency pays the caregiver and your part in the payment process is relatively simple: cut a weekly check to the staffing agency of choice.
However, personally hiring a caregiver has advantages. For example, your payment of $15 – $20 per hour is going to the caregiver as opposed to being split with the agency. Which is best for your situation is beyond the scope of this article. To take advantage of direct hiring means that you must educate yourself on how to pay and file any necessary reports for taxes, unemployment or worker’s compensation. This series will cover all aspects of properly paying for the caregiver(s) that you may hire.
Is the caregiver an employee or independent contractor?
This is the first and most crucial determination that must be taken to pay a caregiver properly. It is probably the most difficult because the answer is not based on a strict formula. Even though the Internal Revenue Service guides us, in the end, the final answer is subjective. Hard and fast rules don’t exist, but the arrangements that you make with the caregiver concerning their schedule, duties, and pay are indicative of either an employer/employee or independent contractor relationship.
What’s the difference?
Hiring an employee requires the reporting of wages, tax withholding, and possibly other requirements depending on the state where the caregiver is employed. An independent contractor requires reporting but no tax withholding. Though it may be tempting to choose the easiest route, beware that your choice depends on the facts and circumstances that exist in the established relationship on a day-to-day basis. You can’t choose to adopt a written agreement declaring that the caregiver is an independent contractor.
Guidance from the IRS
For many years the determination of who is an employee and who is an independent contractor has been governed by a ruling that the Internal Revenue Service made in 1987 (Rev. Rul. 87-41). Twenty factors outlined in the IRS ruling form the basis for whether a caregiver is an employee or independent contractor. The elements fall into three broad categories: financial control, behavioral control and the nature of the specific relationship. Assess the relevant factors outlined below in light of the agreement with the caregiver to determine how much control the hiring party has over the hired caregiver. Even though the IRS revenue ruling contains twenty factors, we leave three at the end of the list that we do not believe are applicable for a caregiver position.
Employee vs. Independent Contractor Test
(Using Revenue Ruling 87-41)
Note: Consider the following factors in total. If more factors indicate employee status, then the caregiver is probably an employee.
If the caregiver is required to comply with your instructions they are probably an employee unless other factors outweigh this significant factor.
If training is provided, there is an indication that the caregiver is required to provide the services in a manner approved by you, thus suggesting an employee/employer relationship.
This test does not usually apply because a private caregiver is not part of a business with multiple processes that require integration. However, a new caregiver who is being integrated into a team of other caregiver employees strongly implies that the new caregiver is an employee.
Services Rendered Personally
This test is tough to overcome because no caregiver is hired without delivering the services personally. But it should not be forgotten that this is a multi-factored test and not based on one factor.
Hiring, Supervising and Paying Assistants
If assistants are hired to help the caregiver who is also responsible for supervising the assistant, generally, the caregiver will be considered an employee.
An employment relationship is indicated if a caregiver is hired with the expectation that the assignment is indefinite. The same is true if the caregiver is asked to work frequently at irregular intervals. This can be especially problematic for caregivers due to the potentially unpredictable needs of an aging senior.
Set Hours of Work
Establishing set hours for a caregiver indicates a type of control leading to a conclusion of employment status. On the other hand, if you hire someone to check on your mother periodically without a set schedule, control does not exist under this element of the test.
Full Time Required
If the agreement with the caregiver is full-time or almost full time, there may be an employer/employee relationship.
Working for More Than One Firm at a Time
A caregiver who provides services to multiple clients may be an independent contractor if other factors, such as set hours, do not indicate greater employee status. The services must be more than just de minimis services for several unrelated persons. However, a caregiver who performs services for more than one person may be an employee of each of these persons, especially if they are part of the same service arrangement, such as a housekeeper providing caregiving services to your Aunt.
Doing Work on Employer’s Premises
Whether this is applicable depends on the type of services to be rendered. Therefore, this factor probably is not relevant in a caregiving role because of the nature of work which is usually in the home of the senior.
Order or Sequence Set
When instructions are outlined for a caregiver to follow the indication is that they may be an employee. On the other hand, if a caregiver is only required to take your Dad to the doctor as needed, this factor would indicate a lack of control.
Oral or Written Reports
Maintaining and documenting a care plan for a client is a component of excellent caregiving. Therefore, in most cases, an employment relationship is indicated in this situation. It is worth repeating that the factors should be considered as a totality and not individually.
Payment by Hour or Week
Hourly or weekly pay points to an employer-employee relationship. Payment by the job (i.e., a trip to the doctor) is indicative of less control and an independent contractor status.
Payment of Business and/or Traveling Expenses
This factor is problematic for the hired caregiver but, if most other factors indicate independent contractor status, this one should not tilt the scales. Payment of mileage or meal expenses for caregivers is commonplace whether there is an independent contractor or employee relationship.
Furnishing of Tools and Materials
If a caregiver is furnished a car or other materials such as a uniform), it could indicate an employee relationship.
Making Service Available to the General Public
The fact that a caregiver or, for example, a caregiving occupational therapist provides services to the general public on a regular and consistent basis indicates an independent contractor relationship.
For a caregiver who comes to work in the home of a senior, this factor is probably not applicable since there are no significant investments made by the caregiver in the “facilities”. But it could be appropriate, for example, for a caregiver who primarily provides exercise therapy and brings equipment for performing her sessions with the senior.
Other factors that probably do not apply to the caregiver role
- Realization of Profit or Loss
- Right to Discharge
- Right to Terminate
Why this determination is important
Paying a caregiver as an employee may be more complicated and cost more than an independent contractor, but it is the correct way to hire a caregiver who is an employee under the above test criteria. Knowing that you have done the right thing will give you peace of mind in an already stressful situation. Once the payment and reporting methods are set up, maintenance of the week-to-week process is simple. Later in this series, we will review how to make the payments to an employee or independent contractor and provide and explain some newer online applications that can be used to simplify payday tasks.
Trying to pay someone as an independent contractor when they are truly employees is not legal and can bring on stiff penalties for incorrect reporting. Federal and state penalties may be imposed, and you may be liable for the tax that your caregiver did not pay if they have not filed tax returns. In the end, the caregiver also loses out by being deprived of social security benefits paid on their behalf by the employer.
Taking the time to make this determination correctly at the beginning will ensure that the caregiver you hire for a loved one feels like a professional. If you have already started paying a caregiver using the wrong classification, there are some remedies, and they will be discussed later in this series.
About the Author: Joy Intriago is the Founder of Seasons.com. She was a caregiver for her father during his years with Lewy Body Dementia. She hired caregivers to assist with his care when she was working. As a Certified Public Accountant, she is qualified to understand the issues involved in paying for employees and independent contractors. She may be contacted at [email protected] or https://www.intriagoadvisors.com/.
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