Hiring Domestics Is Still Confusing
Q: I want to hire a cleaning woman. What do I have to do to make sure that I am handling the matter completely legally? What forms do I have to file and how do I pay the required taxes?-- D.E.B .
A. The good news is that Congress passed a bill last year significantly simplifying the rules covering the paying of taxes for household employees. The bad news is that the real stumbling block--whether your nanny, maid, gardener or pool maintenance worker is your employee or an independent contractor--remains unchanged. It is as confusing and difficult as ever to determine whether Congress’ new and easier rules apply to your situation.
The Internal Revenue Service has tried to demystify the rules, but the subject defies simple treatment. Even the authoritative IRS Publication 926, titled “Employment Taxes for Household Employers,” says that determining whether someone is an employee or an independent contractor depends on the facts of each case. Publication 937, “Employment Taxes,” lists 20 factors to help you determine whether you are an employer or are using the services of an independent contractor. (For a copy of these free pamphlets, call [800] 829-3676.)
However, there are still some loose guidelines that apply to the question.
In general, if your domestic worker is under your direct control, works the hours you specify, performs the tasks you want and derives the bulk of his or her income from you, he or she is an employee. And if you pay this worker more than $1,000 per year, you must comply with the federal Social Security Domestic Employment Reform Act of 1994.
Beginning this year, the law requires that you file a statement with your annual income tax filing noting your status as a domestic employer. You must also include Medicare and Social Security taxes for your employees. (Beginning in 1998, the government will require payment of these taxes either quarterly by the employer or through employee withholding.)
California requires that employers of domestic workers register with the Employment Development Department within 15 days of paying a worker $750 in cash in a single calendar quarter. You are required to pay disability insurance to the state for these workers if they receive between $750 and $999 in a single calendar quarter. You must pay unemployment insurance, disability insurance and employment training taxes if the worker receives more than $1,000 in wages in a quarter.
Who Pays Estate Taxes After a Donor Dies?
Q. I understand that when appreciated property is passed to an heir, the asset is revalued as of the donor’s date of death. But what happens when the asset continues to appreciate after the donor’s death? Let’s say the donor’s will specifies that the asset be sold and the proceeds distributed among the heirs. Is the estate or are the heirs responsible for any taxes due on the post-death appreciation?-- T.G.S .
A. The answer depends on the timing of the asset sale, distribution of the proceeds and the termination of the estate. If the assets are sold and the proceeds distributed in the same year the estate is terminated, then each heir is individually responsible for taxes on any taxable appreciation of the asset. However, if the assets are sold and the proceeds are distributed before the final year of the estate’s operation, then the estate is responsible for paying any taxes.
By the way, you should know that the donor’s assets can be valued as of his or her date of death or on an “alternative valuation date,” which is six months after death. However, if the latter date is selected, all the assets in the estate must be set on that date; you may not choose two dates and allocate assets between them.
Wise to Revisit Your Will if Change Dictates
Q. I had a will drawn several years ago and in it gave my grandsons the assets in a mutual fund I held. Now one of these boys attends college and I liquidated the fund to cover his expenses. Should I rewrite my will or draft a codicil to note that I no longer own the above-mentioned mutual fund? I am concerned that disposition of my estate could be hampered by the inclusion of an account that no longer exists.-- D.V.R .
A. Although it is not absolutely necessary that you revisit your will, you would be wise, at the very least, to append a codicil noting that the mutual fund mentioned in the will has been cashed out. You could mention that its proceeds were used for the education of one of the grandsons, if you believe that he could claim that he is entitled to an amount equal to that once held in the fund.
Your question brings up the very important larger issue of reviewing one’s will every several years to determine if changes in the law or your circumstances dictate the need for modifications of the document.
Although it is not mandatory that you consult an attorney or other trusted adviser for this, the larger and more complicated your estate, the more the advice of a competent professional is needed.
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles CA 90053.
