Speed Cleaning (11 page)

This question has more practical importance than you may have imagined, because the answer to it may determine whether you are personally liable for back taxes and penalties when your housecleaners (former and current) reach retirement and apply for Social Security benefits. In many cases, if their Social Security accounts are deficient, the IRS has been regularly ruling that their Social Security payments should have been paid by the people whose homes they cleaned. The IRS is ruling that the housecleaners were actually employees of the person whose house they were cleaning. That means you, gentle reader, and having an employee has a whole new set of rules.

If you hire a cleaning company that pays or withholds the necessary taxes and keeps the records that are required of businesses by the IRS, you shouldn’t have much to worry about. Likewise, if you find your cleaner through an agency, the cleaner is generally not your employee if the agency is responsible for who does the work and how it is done. But if you find a cleaner through an agency or association that merely provides a list of housecleaners and does not regulate the hours of work, collect the pay, or set the standards and methods of work, the cleaner may very well be your employee. Likewise, if you hire an
individual on the basis of a referral from a friend or neighbor, it’s very possible that the cleaner is your employee.

There are good (or at least practical) reasons to prefer that your housecleaner
not
be your employee: It’s less complicated and less costly. When someone is your household employee, you must collect, report, and match Social Security taxes, and sometimes pay federal unemployment taxes. Worker’s compensation coverage must be provided for also.

Obviously it’s much easier for you to call the housecleaner a non-employee or self-employed person. The proper term in this case is an independent contractor. If your housecleaner is an independent contractor, you do
not
have to withhold or pay any payroll taxes or file any employment reports or forms. All those things are the responsibility of the housecleaner—not you.

Ah! There’s the rub. A typical example of an independent contractor is a lawyer hired to write a will. Although you are paying the lawyer, you don’t have much control over his or her work—for example, how to write the will or what specific hours to work. And as long as the lawyer
is doing the job properly, it won’t be simple for you to dismiss him or her until the job is completed. For the IRS, control over the work of another person is probably the most important single distinction between an independent contractor and an employee.

In the case of housecleaning, if a worker performs services that are subject to your will and control—in terms of both what must be done and how it must be done—then that worker is your employee. It doesn’t matter if you actually exercise this control as long as you have the legal right to control both the method and result of the cleaning services. Nor does it matter if you call the housecleaner an independent contractor. Nor does it matter if the housecleaner works full-time or part-time.

A few characteristics of an
employer
of a housecleaner are that the employer:

A ruling in any one of these traits may mean that your cleaner is an employee of yours. (For a list of all twenty factors the IRS takes into consideration, see IRS Publication 937—“Business Reporting.”)

If you treat an employee as an independent contractor and you shouldn’t have, it’s possible that you’ll get a bill for all of your housecleaner’s Social Security taxes plus a fine of 100 percent!

So, you ask, who cares about all this? You have no problems, right? You like your housekeeper and he or she likes you, and your way of paying wages has been working out just fine. So far.

Problems can and do arise a few years down the line when your housecleaner reaches retirement age and wants to start collecting Social Security benefits. If no one has been paying into that Social Security account, the housecleaner has no basis for collecting benefits.

Of course, what happens next is a stimulating discussion between the housecleaner and the IRS representative: The housecleaner has spent the last twenty years cleaning houses, so where are the retirement benefits that she or he has worked so hard to collect? Let’s assume the housecleaner had paid income taxes every year, as many do. But no one had ever paid into his or her Social Security account. Maybe nobody even thought about it. Well, one thing leads to another, and, after a few seconds of deliberation, the IRS determines that the housecleaner was a household employee all those years—not an independent contractor as you had supposed. All of a sudden, you may be looking at a sizable tax bill.

To test these waters, I filed three sets of Form SS-8 with our local IRS public affairs officer. These forms are called “Information for Use in Determining whether a Worker Is an Employee for Federal Employment Taxes and Income Tax Withholding.” Whew. The IRS officer let me fill out this form with hypothetical cases, and agreed to make hypothetical rulings based on my three examples:

1. I filled out the first form as if I were the housecleaner. I described myself as an individual cleaner who cleans five different homes during the week, is expected to be there on a certain day, and is paid by the hour. I follow a list if left by the homeowner; otherwise I do the “normal cleaning.”

2. I filled out the second form as if I were the homeowner. The working conditions were the same as in Form 1. I said I hired him because—on a different day of the week—he works for a neighbor who raved about his work.

3. I filled out the third form in exactly the same way as Form 2, except I said I hired the cleaner after finding a mimeographed flyer under my car’s windshield wiper. In the flyer, the business was identified as “Ruth’s Cleaning” and a phone number was given.

The IRS ruled that the housecleaner in all three cases was a “household employee.” They based their decision on the control factor alone.
The IRS felt the client directed the housecleaner’s work. That was enough for them—even in the case where the flyer was left soliciting business.

It appears that the IRS regularly rules against many people who hired housecleaners who they thought were independent contractors, ruling instead that they are in a special category called “household employees.” Here’s the IRS’s definition of the term:

A homeworker who works by the guidelines of the person for whom the work is done, with materials furnished by and returned to that person or to someone that person designates.

Unlike standard employees, you do
not
have to withhold income taxes on wages paid to a household employee for services performed in or around your private home (unless the employee asks you to and you agree to do so). But if you pay a household employee $50.00 or more during a calendar quarter, you must withhold the employee’s share of Social Security tax (FICA) from his or her wages, and you must match that amount from your own funds. It doesn’t matter whether wages are based on the hour, day, week, month, or year. The value of food, lodging, clothes, bus tokens, and other noncash items given to household employees is
not
subject to FICA tax.

Tax regulations are almost always open to interpretation, and the employment status of your housecleaner may still require clarification before you feel confident of how to proceed. You may request the IRS to make a ruling for your particular set of facts and circumstances by filling in Form SS-8—the same one I sent in with three fictitious examples.
However,
this is
not
confidential information. If the IRS rules against you, they may follow up on it to see if you made any necessary changes.

If it turns out that your housecleaner is your employee, it really isn’t too time-consuming or complicated to comply with these tax requirements. We’ve listed below the basic steps and the IRS forms you’ll need. The forms are available at IRS offices or by calling 1-800-424-FORM. For additional general information on the subject, also request Publications 926 and 937 and Circular E. We must make the disclaimer that we’re not tax experts, so be sure to check with the IRS, your accountant, lawyer, guru, or some other source if you have questions.

1. Employer Identification Number (EIN). Form SS-4.

2. Record keeping. Publication 926, page 4.

3. Social Security Taxes (FICA). Form 942 and Form W-2 for you and Form W-4 for your housecleaner.

4. Federal Unemployment Tax (FUTA). Form 940 (or 940-EZ) and Employer’s Annual Federal Unemployment (FUTA) Tax Return.

5. Advance Payment of Earned Income Credit. Notice 797, Form W-5, Form 942, and Form W-2.

So far, we’ve not mentioned any state requirements. Check with your accountant, or place a call to your state employment or labor department to check the requirements in your particular state.

In California, for example, all homeowner’s or renter’s insurance policies must provide coverage for any household employees in your home. If you don’t have such a policy, you are responsible for providing worker’s compensation insurance coverage for your employee. It’s not that unusual for housecleaners to hurt themselves while cleaning a home. A slip on a wet floor, a fall from a ladder, or a back thrown out from changing the bed or vacuuming could be a financial disaster if you don’t have insurance for the housecleaner.

We’ve assumed throughout this discussion that the housecleaners are citizens or have legal status to work in the USA as aliens. If not, it’s illegal for you to hire them as your employees. If they are working for a company or are independent contractors, you have no responsibility to determine their legal status. In that case it’s between them and the Immigration and Naturalization Service—not you.

The good news is that unless the payments you make to the independent contractor/cleaner are a business expense (i.e., used in the course of
your
trade or business), you don’t have to report any payments made to them. In other words, if your housecleaner is not your employee, you do not have to file any report or fill out any tax form of any kind. If the payments you make to your cleaner are a business expense to you, report payments greater than $600 on IRS Form 1099.

No matter what the employment status of your cleaner, you still have the same goal: to get the house cleaned on a regular basis without having to do it yourself and with
less
grief and bother than if you did it yourself. Seems easy enough. Naturally, it’s not. So now let’s turn our attention to the management skills necessary to get the most out of your cleaner or cleaning service.

Here are the problems I have heard most often in the twelve years I’ve been in this business. The housecleaner:

If you’re tired of trying to correct these problems, and if throwing good money at them is beginning to seem like more trouble than cleaning your house yourself, we’ve got some suggestions. We realize that we’re often asking you to change instead of the cleaner. It’s not a perfect world. And sure, there are plenty of housecleaners who should be fired or should be, perhaps, truck drivers instead. But if you’re willing, you can learn techniques to stay in charge, to create a better work place, and to motivate your cleaner to get the job done the way you want it done. Basically, we suggest
managing
your housecleaner as you would anyone who works for you in the office or at home.

Honing your management skills can really pay off, because most housecleaners are ever so slightly less than perfect. That includes The Clean Team! But certain customers really know how consistently to get the very best we have to offer, despite our limitations. We’ve cleaned for some of these folks for years, with inevitable personnel changes on our teams. But these customers manage to get even the newer cleaners to perform as if they had been around for much longer, to work harder, to apply themselves more diligently, to agree to do extra tasks, to take pride in their work—and to do all this with a smile and a feeling that these clients are really special.

Naturally, this isn’t just luck. These customers realize that their hiring options are extremely limited. They can hire only perfect housecleaners (quite difficult to do). Or they can hire and motivate someone with the potential to be a very good housecleaner.

Johnson and Blanchard said in
The One Minute Manager:
“Everyone is a potential winner.”
¹
Like the favorite clients I mentioned above, good managers promptly turn potential into hardworking reality. These clients are those “lucky” people who always seem to find a great cleaner or cleaning service (or contractor or dry cleaner or dentist). Exactly! They create that luck through good management.