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Posted November 18, 2008

Ask An Expert

Taxes: What's Required if I Hire a Friend as Caregiver?

Q. If I hire a person privately (family friend) to be a live-in caregiver for my parent, am I responsible to take taxes out of her pay, or is she responsible? And, do I need to obtain workers compensation insurance?  

Linda B., Franklinville, New Jersey.

A. In your situation, the Internal Revenue Service would consider you or your parent to be the employer.  As employer, you are responsible for collecting and remitting payroll taxes.  Before you get too far, read IRS Publication 926 which deals with household employees.  Then you need the caregiver to complete a Form I-9. 

 

Since this is a household employee, the Social Security and Medicare taxes, as well as the federal unemployment taxes, can be paid with your parent's tax return on Schedule H.  You have the option of paying the employee's share of FICA or withholding it from their pay, but remember that if you pay it, you will need to gross up their salary for this.  

 

Also, you will need to register with the state of New Jersey to pay the state unemployment tax. You do not have to withhold the employee's federal and state income taxes, as they can send in quarterly estimated taxes for this.  You definitely should call the appropriate state office in New Jersey to determine if you need worker's compensation insurance, but I assume you will need to buy a policy, as that is common as well as sensible. 

You will also need to take care of the year-end tax filings to the IRS and New Jersey, including Form W-2.  This is a lot of paperwork, but at least you will have piece of mind knowing your parent is well taken care of – and that you are proceeding legally.

This answer has been provided by Carol I. Katz, MS, CPA, the Deputy Tax Director at Leonard J. Miller & Associates, Chartered, in Baltimore, Maryland. Carol Katz works exclusively in the tax and financial planning areas, has been published in professional journals and has discussed tax issues on television and public radio. She can be reached at carolkatz@lenmiller.com. 

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