How to Pay Employees
When we meet with new clients, we often find that they are unaware of the laws and regulations regarding the employment of household staff and home health aides.
They pay in-home workers on an informal basis for cleaning, cooking, childcare, elder care, etc., with no documentation in place.
This “off-the-books” form of employment often occurs when someone hires a helper for intermittent work and the two mutually agree to a casual payment arrangement.
However, when the occasional work develops into ongoing work, the casual payment arrangement becomes risky for both parties. The employer is at risk of legal complications, and the employee is at risk of having their future unemployment and retirement benefits limited.
The Rationale for Off-the-Books Employment
For the Employee:
- Liking receiving cash
- Thinking that they won’t have to pay income tax
- Preferring not to report income as it may compromise their eligibility for benefits like Medicaid, Marketplace Health Insurance, SNAP benefits for food, college scholarships, etc.
For the Employer
- Assuming that an intermittent help arrangement doesn’t justify the paperwork
- Thinking that having only one employee does not require a structured payroll
- Avoiding a difficult conversation with their employee
- Believing that setting up a payroll system is too complicated
- Wanting to avoid the additional cost of employer taxes
The Risks of Off-the-Books Employment
For the Employee:
- Not having unemployment benefits if they’re laid off or if the person they’re caring for dies
- Not having insurance coverage for an on-the-job accident or a need for family leave
- Not earning credits toward Social Security and Medicare benefits
- Not having proof of employment to support applications for housing, loans, etc.
For the Employer:
- Incurring penalties if the authorities discover the employment relationship through an unemployment claim
- Missing a possible tax deduction for home health care payments
- Facing a lawsuit for an on-the-job accident
Considering these risks, the wisest choice is to employ workers legally and compensate them through a payroll system.
Although the cost of services and administrative work will increase, we encourage our clients to use the payroll system to minimize legal risks for employers. In addition, it eliminates the need for large amounts of cash, provides a future for their employees, and ensures that medical deductions for home health aides are well documented.
Converting to On-the-Books Employment
Legal & Administrative Steps
First, an employer must apply for an Employer Identification Number (EIN). Their EIN establishes their domestic payroll operations with the IRS and state governments for tax and other purposes, such as Workers’ Compensation.
After registering with the state, employers must collect and submit identifying information about their employees.
Employers must withhold taxes on wages, salaries, bonuses, and any other income payments to employees. The taxes are then submitted to the IRS and state governments.
Staff Relations
Employers should start by having an open conversation with staff. They can explain the legality and security of a payroll system and help staff understand the impact of tax withholding.
Discussing how the system will benefit everyone involved can help reach an agreement on a new pay structure.
Using a Payroll Company
Some employers manage payroll administration themselves, while others enlist the assistance of a payroll company. Payroll companies provide valuable services by:
- Calculating an employee’s gross income so their take-home pay equals the agreed-upon amount.
- Determining taxes owed by employees and the employer
- Ensuring compliance with minimum wage and overtime requirements
- Facilitating electronic transactions like transferring funds from the employer’s account and paying employees via direct deposit
- Providing payroll information on each paystub and preparing year-end W-2 forms
- Reporting and remitting the Federal and state withholding and employer taxes accurately and on time
- Preparing the Schedule H form for the employer’s accountant
- Providing guidance to find Workers’ Compensation and Disability/Family Leave insurance
The payroll company’s services can substantially lessen the employer’s administrative burden while meeting all governmental requirements.
Learn more in the first article in this series: Hiring and Paying In-Home Workers – Part 1