Employee vs. Independent Contractor: What Nanny Agencies Need to Know

Protect your agency from fines, penalties, and reputational damage by properly classifying your nannies and sitters.

For nanny agencies, correctly classifying workers is not just a best practice—it’s a legal obligation. According to IRS regulations, nannies and babysitters cannot be classified as independent contractors. They are always considered employees, either of the family they work for or of the agency that places them.

This classification carries important implications for labor laws, tax responsibilities, and employee benefits. Misclassifying a nanny or babysitter as an independent contractor can result in costly fines, back taxes, and legal disputes. Agencies and families must fully understand the requirements to maintain compliance.

Why Nannies and Babysitters Are Employees

Under IRS guidelines, the nature of nanny and babysitter work inherently makes them employees. This is because:

  1. Behavioral Control: The family or agency directs how and when the nanny performs her duties, including schedules, tasks, and methods.

  2. Financial Control: Nannies typically rely on the family or agency for payment and rarely invest in tools or resources for the job.

  3. Relationship Factors: The work performed by nannies is integral to the family or agency’s needs, and their roles often have a degree of permanence.

The IRS specifically excludes nannies and babysitters from being categorized as independent contractors because they do not operate as independent businesses offering services to the general public.

Consequences of Misclassification

Misclassifying nannies or babysitters as independent contractors can have severe consequences for agencies and families, including:

  • Fines and Penalties: The IRS can impose back taxes, interest, and penalties for unpaid employment taxes.

  • Legal Liabilities: Workers can file claims for benefits they were denied, such as overtime pay or workers' compensation.

  • Reputation Damage: Misclassification can harm trust with families and workers, leading to loss of business.

Best Practices for Nanny Agencies

To ensure compliance with IRS regulations, nanny agencies must take the following steps:

  1. Classify Correctly: All nannies and babysitters should be classified as employees. If your agency pays your nannies or sitters, you are the employer and are responsible for payroll taxes, workers’ compensation, and compliance with labor laws. If your families pay the nannies or sitters, the family is the employer.

  2. Use Employment Contracts: Clearly outline the employment relationship in written agreements with nannies and babysitters. Specify roles, responsibilities, and payment details. If you are placing caregivers with families to employ you should have your caregivers sign a non-employment agreement with your agency to avoid co-employment, like this one from JA KNAPP.

  3. Educate Families: If the family is the employer, ensure they understand their legal obligations, including payroll taxes and compliance with wage and hour laws. Refer them to the nanny tax experts like GTM or Homework Solutions for free advice!

  4. Stay Informed: Regularly review state and federal laws related to nanny employment. Different states have different laws around overtime and control of the domestic household worker relationship. IRS Publication 926, Household Employer’s Tax Guide, provides detailed guidance for families and agencies.

Adapting to Changing Relationships

As roles and relationships evolve, it’s essential to reevaluate compliance. For instance, a nanny working occasionally for a family may take on a more regular schedule, solidifying her status as an employee. Agencies and families should regularly review their arrangements to ensure they meet all legal requirements.

By adhering to these guidelines, your nanny agency can protect its reputation, avoid legal risks, and provide families with peace of mind. Compliance is key to building trust and fostering lasting relationships in the childcare industry

Do you enjoy learning new strategies like these? How about being able to connect with other agency owners by discussing important topics and sharing ideas? This exact kind of knowledge-share is why Megan and her team created Arise.

Arise is a private community for nanny agency owners to lean on each other for support and inspiration in a safe, judgment-free environment. We also have all sorts of fun events coming up, so join us here.

*This blog was adapted, with permission, from the O’Connor Insurance article titled “Independent Contractor vs. Employee.”

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