Does Paying Someone Less than $600 a Year Make Them an Independent Contractor?

No!

Unfortunately, many family child care providers and tax professionals make this mistake. They assume that they can treat a person who helps them care for children as an independent contractor because they pay the person less than $600 a year. Wrong.

When you hire someone to help you care for your day care children you have an employee, not an independent contractor.

This is true even if you paid the person $50 in a year! It's true even if you hire your grandchild!

When would you have an independent contractor? If you hired someone to clean your home, mow your lawn, or shovel your driveway -  you have an independent contractor.

If you hire someone who does a music lesson or puppet show for the children, this person is also an independent contractor. This is because the person does not operate under your direction or control.

Note: There are two situations where you might hire someone to help you care for children and the person would be considered an independent contractor.

The first situation is a person who is self-employed in the business of providing substitute care for child care providers.  Such a person should have a business name registered with your state and their own taxpayer identification number. She should work for more than one child care provider each year and use her own contract. 

The second situation is when you hire a substitute through an employment agency and you pay the agency rather than the substitute. 

There is a big difference between hiring an independent contractor and an employee.

If you had an independent contractor (which you probably don't!) you would only have to give this person (and the IRS) a Form 1099 Misc if you paid them $600 or more in a year. You are not required to file any other forms or pay any payroll taxes. You can deduct what you paid the person as a business expense. For more information, see my article, "Are Helpers Your Employees or Independent Contractors?"

If you have an employee you must withhold and pay Social Security/Medicare taxes, pay federal and state unemployment taxes, perhaps purchase workers' compensation, and file a lot of federal and state tax forms. For more information, see my article, "Your Payroll Tax Responsibilities as an Employer."

I hear from many child care providers each year who have been improperly treating their employees as independent contractors. I know how frustrating it can be to hear the bad news that you must treat child care assistants or substitutes as employees.

I wish it was simplier! 

See all my articles on employee issues.

Image credit: theopticalvisionsite.com

For more information on your responsibilities as an employer, with examples of how to fill out all federal tax forms, see my 2011 Family Child Care Tax Workbook and Organizer.

Comments

[Hilary Cypher]

Tom, what are the tax consequences for a person who WOULD be considered an independant contractor? I know a woman who substitutes once in a while for another provider in my area, and I am considering having her substitute occasionally for me as well. Would it benefit her at all to get a tax id number and work for both of us as an independant contractor?

[Tom Copeland]

If you truly had an independent contractor and paid them less than $600 in a year, there are no forms to fill out. If you paid $600 or more, you must file a Form 1099 Misc. with the IRS and give a copy to the independent contractor. No other forms or taxes are owed. In both cases you can deduct what you pay the person. It's thus much easier for you if this person is an independent contractor. So, she should get a tax id number. For more, see my article: http://www.tomcopelandblog.com/2011/03/what-is-an-independent-contractor.html

[VV]

Is there any way that the IRS would know if I was paid by less than $600 as an independent contractor if I didn't claim it?

[tom]

If you were audited as a provider, the IRS would ask to see attendance records or CACFP records that would indicate how many children were in your care. Then they would see if you got paid for each child. If you are not a provider, you could be found out if the person you worked for got audited and listed you as an expense.