The Many Business Responsibilities of Hiring an Employee
by Tom Copeland

It should be so simple: a family child care provider wants to hire someone to help her care for children on a part- or full-time basis. But hiring an employee is a complex process involving numerous tax, insurance, and legal issues that many providers ignore at their own peril.

What is an Employee?
Anyone who works for pay in your home helping you care for children is your employee, with a few exceptions. Someone presenting a puppet show (or dance or swimming lessons, etc.) or other special event is not your employee. Someone who is in the business of providing substitute care is also not your employee. A substitute caregiver needs to operate as a self-employed business, meaning that they should have a registered business name, a taxpayer identification number, work for several other providers, and use their own contract. Many providers make the mistake of assuming that they can treat workers as independent contractors if they pay the person less than $600 in a year. This is not true. You have an employee regardless of how little you pay the person.

Tax Issues

• Obtain a taxpayer identification number - Form SS-4
• Fill out Form I-9 to verify that the employee is eligible to work in the U.S.
• Have the employee fill out Form W-4 to determine if you must withhold federal income taxes from the employee's pay
• Withhold social security and Medicare taxes quarterly - Form 941
• Pay federal unemployment taxes annually - Form 940
• File annually Forms W-2 and W-3 to report social security and Medicare taxes (to obtain these forms, contact the IRS at 1-800-829-3676
• File any forms required by your state for state unemployment taxes and other state taxes
• Pay at least a federal minimum wage of $5.15 per hour (state minimum wage laws may be higher)
• If required by your state, purchase workers compensation insurance.

When faced with all of these forms and taxes, many providers feel like throwing up their hands in frustration! You can get help from a local tax preparer or use my book Family Child Care Tax Workbook and Organizer, which details how to fill out all the federal forms. Redleaf National Institute, in cooperation with NAFCC, is also lobbying the IRS to simplify some of the federal tax forms. We have proposed that providers who pay only a small amount in salaries be allowed to pay the payroll taxes at the end of the year rather than quarterly. Stay tuned for further developments.

It's Not Just the Taxes
Although the taxes due on hiring a part-time employee may be small (about $8 in federal taxes for every $100 of salary), providers should be aware that the bigger issue to them is the risk of an employee becoming injured on the job or being accused of child abuse. To protect themselves in these situations providers should make sure that they comply with state workers compensation insurance laws, and have business liability insurance that covers their employees.

Employee Checklist

Before You Hire

• Ask your insurance agent whether your business liability policy provides coverage for child abuse by all your employees or unpaid workers.
• Contact your licensor and ask if there are any state regulations about the qualifications of the workers you hire. Your state may also require background checks.
• Check with your state attorney general's office for guidelines on hiring and firing employees (illegal discrimination).
• Find out if you are subject to any deed restrictions, homeowners association covenants, or zoning laws that might restrict your right to hire employees.
• Carefully screen potential employees (criminal background check, credit check, past work references, previous coworkers references, education credentials).

After You Hire

• Write an employee manual that includes your state's law about corporal punishment. Your manual should also spell out your state's child abuse mandated reporting law.
• Share your health, safety, and emergency procedures with your employees. Make sure that they understand who is authorized to pick up each child and any special custody arrangements for the children in your care.
• Give your employees training (or send them to workshops) on child abuse and neglect, CPR, child development, and appropriate discipline measures.
• Closely supervise your employees and conduct regular reviews of their performance. Be sure to discuss stress and how to reduce it.
• Discuss your policies regarding privacy and your commitment to confidentiality in dealing with the families of the children in your care.
• If your employee uses her car in your business, you can buy "hired and non-owned liability" coverage that will protect you against lawsuits if this person is at fault and hurts someone else. If your employee will drive your car for your business, make sure this is covered by your vehicle insurance policy.

Is this all worth it? Yes. Many providers enhance the quality of their program or are able to increase their income by hiring employees. By following these steps you are also taking reasonable precautions to protect yourself from unwanted risks. For further help on the legal and insurance issues surrounding hiring employees, see my book.

Institute Lobbies IRS for Payroll Simplification

The IRS is considering a proposal from Redleaf National Institute to simplify the record keeping requirements for family child care providers with small payrolls. In August, 2004 we had several phone conversations with the IRS as we continue our lobbying effort.
Earlier this year the IRS indicated that they are likely to implement a plan to eliminate the need for family child care providers (and all employers) who hire employees to file the quarterly Form 941, beginning in the 2006 tax year. Providers must have less than $2,500 in employment tax liability each quarter. They must also have 8 quarters of consecutive compliant history to participate. Although the filing of Form 941 would not be required, providers would have to pay the taxes quarterly using the EFTPS electronic payment program. Details about this program are likely to be announced this fall.
Upon hearing of this plan, the Institute contacted the IRS to express our concern that this would have little, if any, impact on family child care providers. The requirement of 8 quarters of compliant history would eliminate the ability of all new providers as well as those who hire workers on a very temporary basis to participate. We stressed the fact that the IRS was likely to see greater tax compliance by providers if they could reduce payroll record keeping requirements. We suggested that providers who have less than $2,500 in employment tax liability in a year, be allowed to pay their payroll taxes at the end of the year, without regard to any previous compliance history. The IRS agent we spoke with who is working on this project was very supportive of our suggestions and forwarded them on to her boss. Later she called us back to say that the IRS would not consider our suggestion in the first year of this new program, because of the complications of setting up the program. However, the IRS has not rejected our ideas and we set up a time in March 2005 to discuss this again with our IRS contact. It is possible that our suggestions may be adopted after 2006. The wheels of the IRS turn slowly.

Tips on Cutting Expenses

There are only three ways of making more money doing family child care:



• Take care of more children
• Raise your rates
• Reduce your expenses

Reducing your expenses is probably the easiest of the three to accomplish. Here are some suggestions on how to do this:



• When you shop, you may be able to reduce your purchases if you follow this advice: shop alone, use a shopping list, bring a limited amount of cash with you, set a limit on how much time you will spend in the store, eat just before you shop for food, and don't shop if you are in a bad mood (some people will try to improve a bad mood by spending more money).
• Reduce the number of times you eat out with your family. When you do, don't buy drinks at the restaurant. Have a drink at home when you return.
• At least twice a year go through your home to determine what items can be sold at a garage sale or given to a charity.
• Do you have seldom-worn jewelry that could be sold to pay off a debt?
• Request an energy audit of your home to get ideas on how to improve energy efficiency.
• Drive your car until you own it, and then keep it as long as you can after that.
• Before buying anything, ask yourself whether the item is a want or a need.
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• Tired of getting all those offers in the mail for credit cards? To remove your name from prescreened credit or insurance offer mailing lists, call 1-888-567-8688. They will contact major credit card bureaus and you will no longer get direct marketing offers. There is no fee for this service.

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