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When you hire a nanny, housekeeper or other domestic worker, pay close attention to the tax rules.
You must generally pay Social Security, Medicare and federal unemployment taxes on wages paid to domestic workers who are considered "employees" under federal law.Over the years, there have been news stories about political appointees and others who got into trouble because they didn't pay nanny taxes. The same could happen to you.
However, you don't have to bother with this if:
Beyond that, you have to determine if domestic helpers are employees under your control or independent contractors in business for themselves.
It's not a simple question, but if the workers come part-time and advertise or hand out business cards, they're probably self-employed and responsible for their own taxes. On the other hand, a live-in housekeeper or full-time nanny who works in your home is an employee.
If you believe a worker is an independent contractor: Put the arrangement in writing and keep a copy of the person's business card, brochure or advertisement. Why do you need this protection? Sometimes, domestic helpers reveal the names of people they worked for when they apply for Social Security. Uncle Sam then sends out assessments for back taxes, penalties and interest — even many years later.
Because this is a confusing issue, consult with your tax professional to ensure you're on the right track.