Say Goodbye to Cash and Venmo: The Importance of Paying Your Household Employee via Payroll
Paying your household employee through a convenient app like Venmo may seem like a great idea at the moment, however, there are many dire downsides to this method. Employees are at risk of surprises come tax time and employers risk non-compliance with state labor laws. Thankfully, there are simple solutions for legally paying your household employees.
In this article, we’re covering what labor law compliance looks like for household employers when it comes to paying employees and why it’s so important to avoid non-compliance as a household employer.
Can My Household Employee Be an Independent Contractor?
If you pay a nanny, house manager, housekeeper or other household employee more than $2,700 per year (as of 2024) you are required to take out taxes from your employee’s pay and are required to have worker’s compensation insurance. When a household employer is hired, the proper forms for them to complete for or with you are typically a W-4, I-9, and W-10. At tax time, household employees should receive a W-2 from you.
Because they do not determine their own working conditions, household employees are not independent contractors and should never file a 1099 of any kind for their income. Nannies and other regular employees of a household should only file the typical tax forms associated with employment.
Can I Pay My Nanny Using Venmo?
While some nannies or household employees may be okay accepting cash or ‘personal’ payments on Venmo or another cash app, this is not a best practice, legally sound, or a professional way to retain top-quality employees. At My Household Managed, we require that all of our hiring families pay their household employees via payroll to support this industry best practice.
In July of 2021, Venmo gave users the option to mark their transactions as being payments for goods or services. While this seems like a more secure way of showing payments and income, it only further complicates the process.
For 2021 and earlier tax years, apps like Venmo and PayPal were only required to issue a 1099-K if someone “had at least 200 transactions worth a combined $20,000 or more,” according to GTM Payroll. As of January 1, 2022, the IRS updated their reporting requirements for payment apps like Venmo and now requires, “reporting of payment transactions for goods and services sold that meets or exceeds $600 in a calendar year. Anyone who receives at least $600 in payments for goods and services through Venmo, or any other payment app, can expect to receive a Form 1099-K,” according to Venmo.
This means that household employees will be treated as independent contractors by Venmo, even if they also receive a W-2 from their employer for their income. Because it is not difficult to set up a payroll system with a trusted company like GTM Payroll, there’s no reason to leave your employee in such a confusing situation at tax time with extra forms and complications to navigate.
Can I Avoid Taxes by Paying My Nanny as a ‘Friend’ on Venmo or Just Use Cash?
Apps like Venmo are now monitoring recurring and suspicious transactions and will flag those that appear to be for goods or services. This is why sending payments as personal to avoid seller fees and IRS reporting is not an effective or legally compliant method either.
Labor law compliance is vital to maintaining professionalism and a quality work experience for household employers and employees.
Most household employees prefer being paid via payroll as it gives them a verifiable source of income, employment history, and reassurance that they are paying their appropriate share of taxes. Being paid via payroll further benefits the employees as they will be able to take advantage of unemployment benefits, social security, and medicare as needed in the future.
How Much Will I Have to Pay in Taxes for My Nanny?
Household employees should only pay 50% of the required Social Security and Medicare taxes. Employers are responsible for the other 50%. Failure on the employer’s part to file the appropriate tax forms and pay these taxes will leave employees paying 100% of these taxes as they would be forced to file a 1099 as an independent contractor to report their income. Which, again, should not happen.
It is also worth noting that employers can, but are not always required to withhold state and federal taxes for their employees. You can find your state’s labor laws here and check out this nanny tax payment calculator to see how taxes on your employee’s wages will affect your budget. If you are a household employee, this is also a great tool to see what your take-home pay will be.
What Are the Benefits of Paying Your Nanny or Household Employees via Payroll?
Paying household employees via an automatic, recurring payroll system is the most straightforward way to ensure that your household employees are properly paid. This way both you and your employee can avoid issues with taxes or legality. Through a payroll service like GTM Payroll, you can also carry worker’s compensation insurance, set up a tax-saving healthcare stipend like QSEHRA, and offer a 401k.
If you have not yet filed paperwork to become a legal household employer, check out GTM Payroll’s article on Nanny Taxes to find out how.
You’ve got enough on your plate in your day-to-day life — let us make your life easier by handling your unique household staffing needs.
If you are a family looking to hire a nanny, household employee or other home service, submit an application with My Household Managed.
If you are a professional nanny, house manager, or other household employee looking for a job, apply at My Household Managed.
Related Articles: