HOUSEHOLD HELP : Nail Down Laws, Taxes on Workers

It’s summer, and for many Orange County households, prime time for hiring someone to help out with home and yard chores or special projects.

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But it’s also the Summer of ‘93, which follows hard on the heels of the miseries that two of President Clinton’s cabinet nominees--unsuccessful nominees--went through because they had not paid attention to the rules when they hired household help.

As America discovered, the law is the law, from the humblest condo to the plushest manse on the hill.

At its uncompromising best (or worst, depending on which side of the paycheck you find yourself) the law says that a homeowner who hires someone to help out often must: Report that employment to the federal and state governments; pay the employers’ share of the worker’s Social Security and Medicare insurance premium payments; give the employee a federal W-2 form to fill out and ensure that he or she is covered by state worker’s compensation insurance.

But, and there almost always is a “but” or two where the law is concerned, you don’t always have to report and pay and insure.

The rules apply only when you have hired an employee because the law makes a distinction between someone who works directly for you and is under your supervision, and independent contractors--such as a plumber--who tell you what a job will cost, show up at their convenience and work at their own pace.

Of course, the whole thing is a lot more complex than that--the rules and their explanations fill thousands of pages in texts about labor and workers’ compensation law. Here, though, are some of the basics:

WHO IS AN EMPLOYEE?

The basic rule of thumb is control, says H. Neal Wells IV, co-chairman of the Orange County Bar Assn.’s workers’ compensation section and an attorney with the law offices of Egger & Hallett in Anaheim Hills.

“The more that you, as the homeowner, control the worker, the more that worker is your employee.”

Workers who don’t qualify as employees are independent contractors.

State and federal laws define independent contractors as workers who have their own business or trade licenses (or should have); provide their own specialized tools and skills; have the right to hire and fire their own help and can dictate, in conjunction with the homeowner, the time they do the work and the manner in which it is done.

Want someone to come in and build a patio cover?

If you look in the phone book and call Pete’s Patios and Pete tells you when he will arrive and how much you are going to pay him; brings his own tools and gives you his business license and workers’ comp policy numbers so you can call and make sure he really has coverage, then Pete is an independent contractor.

But if your neighbor tells you about a handyman friend of his who does great work and you call and offer him $200 to build a patio cover and you buy the lumber and tell him what weekend to show up and provide some or all of the tools for the job, then he’s your employee.

Does Junior Crabtree, the high school kid down the block, mow your lawns? Figure he or she is your employee. Same with baby-sitters.

One sticky area is determining the status of maids and other household cleaning help, Wells said.

Obviously, if Flora the floor cleaner or Walter the wall washer are hired the same way you hired the handyman, they are your employees.

But what if you call Mortimer’s Maids? Mort says sure, he can send someone out, every other Thursday from 11 a.m. to 4 p.m. for $75 a day.

Mort seems to fit the definition of an independent contractor, but Wells says that if he doesn’t have workers’ comp insurance, or if the homeowner pays the maid directly, the cleaner has a claim against the homeowner’s insurance if injured on the job.

In California, homeowner insurance policies are required to provide workers’ compensation coverage for household employees--defined by state law as someone who, in a 90-day period, works for a homeowner, at the home, at least 52 hours or is paid at least $100 and is not an immediate family member.

For federal and state withholding and employment reporting purposes, however, the minimum requirements are tighter.

“If you have a household employee, and you pay that person more than $50 in a three-month period, then you are required to file a federal Form 942 with the IRS” alerting the government to the employer-employee relationship, said Greg Lewis, a certified public accountant and partner in the Santa Ana accounting firm Elliott, Lewis, Lieber & Stumpf Inc.

While the hours and pay are less than under workers’ compensation’s definition of a household employee, “the issue is still control,” Lewis said.

“The common law test is to determine who controls the manner and means of how and when the work gets done,” he said.

“Governesses, maids, butlers, full-time tutors, all those people who work mainly for you, are generally employees for reporting purposes,” said Marilyn Vanier, a paraprofessional with Lewis’ firm. “People in distinct trades who contract for their services generally are not considered employees.”

There is one wrinkle in the rules for reporting employment, however--the definition of an employee can also depend on how much of the person’s work overall is done for you.

So if you do hire Junior Crabtree to mow your lawn and he comes every week and yours is the only lawn he mows, Junior is your employee for reporting and workers’ compensation purposes.

But if Junior has a whole route and does half a dozen lawns each weekend, it’s probably safe to consider him an independent contractor for reporting purposes and an employee for workers’ compensation insurance purposes.

To be safe, Lewis said, if you think you have an employee on your hands, you probably do.

WORKERS’ COMPENSATION

“We have workers’ compensation laws because of reformers around the turn of the century who saw that it was common when employees were injured on the job for them to be terminated and to have to fend for themselves,” said Wells.

“So now California law says that almost all employees must have workers’ compensation insurance. The most prevalent exceptions to that are one-person businesses and homeowners.”

The one-person business doesn’t need coverage because the state figures that since the only employee is also the owner, the lack of coverage won’t affect any uninformed, innocent parties.

Homeowners don’t need to find separate workers’ comp insurance because the state passed a law in 1977 that requires all homeowner insurance policies to include workers’ comp coverage for the occasional domestic or household employee.

But don’t sigh that sigh of relief quite yet, Wells cautions. There are times when a homeowner’s policy won’t cover someone who works around your house, and there are times when it will cover some but not all of a claim or award.

Basically, homeowners’ policies provide automatic workers’ comp coverage for household employees. For condo owners, the master association policy covers workers outside of the individual units, but a special condo owner policy might be needed to cover inside workers, such as maids and baby-sitters. In California, renters’ policies also provide workers’ comp coverage.

Baby-sitters and other young employees--the neighborhood kid who mows the lawn, for instance--bring up one other issue: age.

If the youth is 15 or older and meets the other workers’ compensation minimums to be considered an employee, then coverage is the same as for adult employees, Wells said.

But if the youth is under 15, the law automatically increases some workers’ compensation benefits by 50%. And the workers’ comp sections of many homeowners’ policies don’t cover the increase, Wells said.

The relief valve is that if young Jody slices off a finger while pruning your roses, her parents would look to the personal liability portion of your homeowner’s policy to make up the 50% increase in the award.

Some insurance companies also will sell special riders for occasional workers who don’t meet the minimums required for employee status--or who are under 15. Without such insurance, someone injured doing work for you would probably have to sue you under the personal liability coverage of your homeowner policy.

It is rare, Wells said, but cases do arise in which a worker is severely and permanently handicapped, isn’t covered by the homeowner’s policy’s workers’ comp section and receives an award that far exceeds the personal liability coverage limit.

“That’s when you call a bankruptcy attorney and do what you can to save the house and the car,” he said.

Which goes to show that knowing your coverage limits and the status of the person you are hiring to do a job is, indeed, a good and prudent thing to do.

Homeowners’ policies usually don’t cover independent contractors. Except, of course, your policy can be on the hook if the independent contractor doesn’t have workers’ compensation insurance because he or she is a one-person business or is just violating the law.

That became part of workers’ comp law in the late 1980s, when the State Contractors License Board released a study that said about half the allegedly licensed contractors working in the building industry didn’t have the proper licenses or insurance coverage for the kind of jobs they were doing.

The result, Wells said, was a new state law that says a worker injured on the job while working for a contractor who doesn’t have workers’ comp insurance can seek benefits from the contracting party.

In the hypothetical case of a worker for Joe’s Tree Trimming who breaks an arm while pruning your tree, that means your homeowner’s policy gets the claim if Joe doesn’t have workers’ comp coverage for his crew.

The best protection--aside from an insurance policy--is knowledge.

Know that when you hire a casual worker you are likely to be considered the employer and liable for workers’ comp coverage. Know just what your homeowner policy covers and whether you need a special addendum, or rider, to provide the kind of workers’ comp protection you’ll need.

And if a potential household worker is supposed to be an independent contractor, ask to see his or her license and call the licensing agency to make sure it is valid. Also ask for a workers’ compensation insurance policy number and the name of the company that issued the policy and call and check on it.

REPORTING AND WITHHOLDING

When you decide to hire someone to work around the house, you need to determine whether you must report that employment to the government and pay into the Social Security and Medicare systems.

Homeowners have to file federal Form 942 for casual household employees. The quarterly filing alerts the government to the employer-employee relationship and includes the employer’s payment for his or her share of the employee’s Social Security and Medicare premium payments.

Those payments are a percentage of wages paid--currently 12.4% up to $57,600 for Social Security and 2.9% up to $135,000 for Medicare. The total payment amounts to 16.3% of wages up to $57,600 and 2.9% of wages from $57,601 to $135,000. Amounts can change yearly, indexed to the inflation rate. (Household employers generally cannot deduct those payments from their taxes.)

Employers are also required to give an employee a W-2 form, although they don’t have to make sure the person actually fills it out and files it with the IRS.

Homeowners who meet the federal test for having a household employee also must fill out and send to the state a form called the ED3, obtainable from any state Employment Development Department office.

What you don’t have to do is withhold state or federal income taxes or state disability insurance payments from the employee’s pay--unless, of course, you have an agreement with the employee to do so.

If you find that the worker you hired is really an independent contractor, you’re still not completely off the hook, however.

“You don’t have to file a 942 or a ED3,” said Varnier, “but if you paid the contractor more than $600 in any calendar year, you must file an IRS Form 1099.”

That’s so the tax man can compare your report of how much you paid the contractor to the contractor’s report of how much he or she made that year.

Hiring Household Help

EMPLOYEE OR INDEPENDENT CONTRACTOR?

The difference is important because it determines if you must provide workers’ compensation insurance, report the employment to the federal and state governments and pay the employers’ share of federal Social Security and Medicare premiums. Generally:

* Employee: The person is an employee if the homeowner determines how and when the work is done, provides the tools, sets the wage or exerts other significant controls.

* Independent contractor: The person is an independent contractor if they are a specialist, hold a license, have special skills or training, provide their own tools, set their own hours in conjunction with the homeowner and do the work without intense supervision.

ARE YOU INSURED?

* Homeowners’ insurance policies: Required by almost all mortgage lenders, they provide automatic workers’ compensation insurance in California.

* Condominium owners: They are covered for workers’ hired to do jobs in common areas under the master homeowner association policy. Not all condo policies cover household employees working inside a unit. A special rider or separate condo owner policy might be needed.

* Workers: Those paid less than $100 in a 90-day period or who work for you fewer than 52 hours in 90 days are not covered by the workers’ comp coverage in homeowners’ policies. Special coverage can usually be obtained, however.

WHAT MUST YOU REPORT?

* Form 942, ED3: The employment of any employee paid more than $50 in a 90-day period; to the federal government on IRS Form 942, to the state on Form ED3. Forms available at local IRS and state Employment Development Department offices.

* Form 1099: The wages paid to any independent contractor who receives more than $600 from you in a calendar year must be reported to the IRS on form 1099.

* W-2: Homeowners with a qualified employee must also provide the worker a federal W-2 form.

TO WITHHOLD OR NOT?

* IRS Form 942: This requires payment of the employer’s share of an employee’s Social Security and Medicare insurance premiums.

* More?: No other withholding or employer payments are required unless by agreement between the homeowner and the employee.

LEGAL OR NOT?

* Homeowner’s obligation: It is the homeowner’s obligation to know whether an employee is legally permitted to work in this country.

* Workers’ compensation: It is generally available to all employees, regardless of their status.

* Social Security cards: The absence of this card is a good sign that a potential employee isn’t legally entitled to a job--and a Social Security number is required on the state and federal forms that must be filed for household employees.

Los Angeles Times