When Does a Gardener Become an Employee?

Q: After Zoe Baird, Kimba Wood and Ron Brown, I’m confused about whether I might need to pay Social Security taxes and unemployment insurance premiums--and file reams of paperwork--for a cleaning lady who only visits twice a month.

I’ve read that the whole rigmarole is required for anyone I pay at least $50 a quarter. But isn’t my cleaning lady what’s known as an “independent contractor,” just like a free-lance writer?

My home is only one of many she cleans. What if I pay a handyman $200 for a single visit? Isn’t he an independent contractor? --D.A.

A: No wonder you’re confused about your legal obligations for people providing baby-sitting, cleaning, repair and similar services in your home. Whether these people are your direct employees or independent contractors is a complicated determination that has largely been overlooked in the coverage of the problems besetting President Clinton’s attempt to find Cabinet members whose backgrounds match that of Caesar’s wife. However, it is, as you have noted, the key to establishing your obligations.

The Internal Revenue Service and Social Security Administration have published several pamphlets on the topic in an effort to demystify the rules. Unfortunately, the subject defies simple treatment. Even the authoritative IRS Publication 926, titled “Employment Taxes for Household Employers,” notes that determining whether someone is an employee or an independent contractor “depends on the facts in each case.”

However, there are some general guidelines listed in that same bulletin that offer help to taxpayers needing to make the determination. Perhaps the single most important distinguishing criterion, says an IRS spokesman, is whether the worker is subject to “your control as to both what must be done and how it must be done.” If you have this control--regardless of whether you choose to exercise it--the worker is probably your employee.

How do you measure how much control you have or whether it qualifies as the kind that makes you an employer?

In Publication 926, the IRS offers 20 factors to help you understand the nature of your relationship with your gardener, cleaning lady or pool cleaner. Must these workers follow your instructions as to when, where and how the work is done? (Employee) Or does your understanding call for them to do a job in whatever manner they want? (Independent contractor) What about training? Employees receive it, independent contractors don’t. Do your workers employ others to perform the service with them? If so, they’re probably independent contractors. Must your worker be available for you full time? If so, he could be considered an employee. Independent contractors generally have no set hours.

If, after examining your relationship with your household help, you determine that you are an employer, you must pay Social Security taxes if the worker is paid more than $50 in any calendar quarter of the year. Unemployment insurance tax must be paid for any employee who earns more than $1,000 a quarter.

How do you comply with these laws? You must file IRS Form 942 each quarter and pay the taxes for Social Security and Medicare. The employee and employer each are required to pay 7.65% of wages. Some employers elect to pay the full 15.3% so the worker’s wages are not reduced. If you do this, you must report the employee’s share of Social Security and Medicare on his W-2 form as part of his wages. Form 942 must be filed by the last day of the month following the end of each quarter. For example, the deadline for the first quarter, which ends March 31, is April 30.

To pay unemployment insurance, you must file Form 940 by the end of the January following the calendar year of employment. The tax rate for 1993 is 6.2% of the first $7,000 of cash wages in a calendar year. Employers may take a credit for paying into a state unemployment insurance fund, but it cannot exceed 5.4% of wages. Most people can file the shorter and simpler Form 940z.

Don’t be fooled by the lack of precision surrounding the distinction between employee and independent contractor. If you make the wrong determination and fail to pay or withhold the appropriate taxes from your employee, you could be required to make restitution for all back employer taxes, as well as up to 100% of the taxes owed by your employee. Employer obligations are spelled out in IRS Publication 937, titled “Employment Taxes and Information Returns.”

To order IRS pamphlets on this subject or any other, call the agency’s nationwide toll-free number, (800) 829-3676.