Should You Pay for Caregivers as W2 or 1099 Contractors?
As a home care business owner, you would want to maximize profitability and mitigate costs. But paying your caregivers as 1099 contractors will come back and bite you.
I have worked with a home care agency that had to pay back $300,000 in back taxes because they misclassified their caregivers as 1099 contractors. This is a position you wouldn’t want to be in.
The legality of paying caregivers as 1099 contractors is a subject of ongoing debate and scrutiny by government agencies, particularly in the home care industry. Generally speaking, home care agencies are required by law to classify and pay their caregivers as W-2 employees, not 1099 contractors.
What’s a W-2 Form?
A W-2 form, officially known as the Wage and Tax Statement, is a document that employers use to report wages paid to employees and the taxes withheld from those wages.
If a caregiver is classified as a W-2 employee as required by the Law, your agency withholds federal and state income taxes, as well as Social Security and Medicare taxes, from their paycheck.
Your agency is also responsible for paying a portion of Social Security and Medicare taxes on your behalf.
At the end of the tax year, typically by January 31st, your employer provides you with a W-2 form that details your annual earnings and the taxes withheld.
What’s a 1099-NEC Form?
A 1099 form, specifically the 1099-NEC (Nonemployee Compensation) form, is used to report income earned by independent contractors, freelancers, and others who are not classified as employees.
If a caregiver is classified as a 1099 contractor, the payer (business or individual) does not withhold taxes from their pay.
Instead, they are responsible for paying their own income taxes, including both income tax and the self-employment tax, which covers Social Security and Medicare contributions.
Consequences of Misclassifying Caregivers as Independent Contractors
Misclassifying workers as independent contractors when they are employees can result in legal and financial consequences for the employer. Here are some of the consequences of misclassification:
1. Wage Law Violations
When employers wrongly classify workers as independent contractors instead of employees, they could face legal issues. The law requires employers to pay fair wages and overtime to employees. If employers make this mistake and violate the rules, they may be held accountable.
Workers who believe they were not paid correctly can file a complaint. They have up to two years for regular mistakes and up to three years if the employer knowingly violated the rules.
2. Unpaid Employment Taxes
For caregivers misclassified as independent contractors, employers may also face penalties for failing to withhold and remit state and federal payroll taxes, including failure to make Social Security and Medicare tax payments
3. I-9 violations
If caregivers are labeled as independent contractors when they should be employees, it could cause problems for the employer in meeting certain verification rules.
Specifically, employers are obligated to keep properly completed Form I-9s on file for each of their employees.
An employer could be subject to an audit of its Form I-9 records by the Department of Homeland Security, Immigration and Customs Enforcement (ICE), and the Department of Labor.
4. Civil and Criminal Penalties
Employers found in violation may face substantial penalties, encompassing unpaid overtime and minimum wage discrepancies. Additionally, they may be liable for liquidated damages equivalent to the unpaid wages and the legal fees of the employees.
Criminal penalties and liability for back wages may also be levied against employers and executives found in violation of FLSA laws.
5. Debarment from Government Contracts
If an employer is found to have violated the law, it may be debarred from government contracts.
6. Class Action Lawsuits
The threat of class action lawsuits should also serve as a further deterrent for companies straddling the boundaries of improper classification.
It’s important for employers to take proper steps to ensure their contractors and employees are properly classified to mitigate compliance risk and avoid these consequences.
Final Thoughts
While there are some situations where it may be appropriate to classify a worker as an independent contractor, such as for short-term projects or specialized services, the home care industry is generally not one of them.
Home care agencies provide ongoing, long-term care to clients, which typically requires a stable workforce of caregivers who are trained and supervised by the agency. As such, it is important for home care agencies to properly classify and pay their caregivers as W-2 employees in compliance with the law.
Businesses all over the country are having problems hiring and retaining employees. This means they have to be competitive in many ways including pay. I can assure you that caregivers will choose an agency that pays their taxes than one that doesn’t.