Personal Risk Management - Domestic Employees

Asset Protection With Household Employees

Asset protection for affluent individuals includes both personal and professional risk management issues. We examine the personal liability issues every successful individual and their advisor should consider when utilizing household employees like housekeepers, nannies, and personal assistants.

Businesses owners, entrepreneurs and physicians are increasingly relying on household employees to help manage their work-life demands. Unfortunately, many of these relationships are not handled with same level of legal compliance and risk management that control their professional employment relationships. These are some of the risk management and legal issues that should be part of your plan.

Who Is at Risk?

The frequency and exposure of lawsuits by various domestic help is a serious and growing threat. I have seen a significant and increasing number of claims by domestic staff including maids, nannies, housekeepers, cooks, gardeners, personal trainers and etc. over the last 20 years.

What Are Employers Getting Sued For?

Claims include wage and labor issues, sexual harassment, personal injury, wrongful termination, and discrimination, in other words, all the usual and most common employment law claims. These claims can range from tens of thousands to hundreds of thousands of dollars or more, depending on the alleged harm to the employee, and they routinely cost five or six figures in legal fees to defend yourself against.

For those that are financially successful and/or famous, even locally, the stakes are even higher as the reputational damage and media attention that comes from these claims can be damaging in many ways beyond just a lawsuit judgment itself. See the headlines for big cases with nasty allegations against celebrities and CEOs as two glaring examples. We've seen it affect contracts, endorsement deals and even stock prices.

I advise all my HNW clients that have domestic employees to consider the following asset protection issues:

1.    Use caution when hiring people who will be the closest to you and your family and pay for a professional background check.

2.    Consider a written employment agreement that includes dispute resolution provisions as well as a confidentiality agreement. This person will see and hear everything that happens in your home.

3.    Be fully insured in all the right ways.

Defensive insurance planning for household employers

I once again turned to liability insurance expert David Moore, a Partner with independent insurance brokerage Shepherd Insurance, for help with my questions on how to properly insure against this risk. Here is a bullet point summary of key issues we discussed, and that he has previously helped me address.

1.    Contact your agent and ask if you have “contingent workers comp coverage” for household employees and what the limits are.

2.    Have a high limit (including high limits of med-pay for injuries on your premises) personal liability umbrella policy on your home and cars of at least $2MM.

3.    Be aware that an adjuster could deny a significant claim for injuries to a regular employee that arguably should have been covered by other insurance, especially if injury is due to the homeowner's own negligence.

4.    Workers comp insurance specifically for injuries incurred by household employees can often be had for less than $1,000. I strongly suggest you make this expense part of your budget if you have regular, long term household help.

5.    Add them to your auto policies as a driver if they will regularly be using your vehicles in the course of their employment. Employees with past bad driving records, tickets, DUIs etc. might raise your risk and your rates, but it's always cheaper than being exposed to a massive lawsuit in a crisis.

6.    EPLI insurance, which I have previously recommended for protecting your practice from employee lawsuits, is also available in a home employment setting.

7.    Will your umbrella protect you if your employee harms another? It depends on your policy language and whether or not a household employee is considered an ‘member of the household” and is an “insured” as defined by your policy. David warned that they can be but may not be if they don't live on site or meet other required qualifications in the language of your specific policy.

Tax Compliance: Are You Paying Them Legally? Maybe Not

One question my clients are often surprised by is when I ask if they have domestic employees and how they are paid. Unfortunately, most people don't treat these professional relationships with the same level of formality and legal compliance that we have continually advised you to handle your medical practice employees with. This lack of formality can lead to some very serious exposures including issues with the IRS and a wide variety of lawsuits including wage and labor claims, personal injury lawsuits and even the same kind of harassment and employment claims you face at your office.

The fact is, many Americans are not compliant with tax and labor laws and pay their household employees in cash with minimal record keeping. This works until it doesn't, usually when there is a dispute over what you owe them, what you have paid them, what you agreed to or when you or they, get audited by the I.R.S.

Here are some basics to consider. As always, when I look at any tax related issue, the first point of authority I seek is the I.R.S. itself and much of the following comes directly from the service and from the Social Security administration itself. That said, this is not tax or legal advice, and should be used a starting point for a conversation with your own advisors. With the following in mind, make educated choices as an employer. 

Tax Law Compliance And Withholding Issues

Which Household Employees Are Exempt from Income Tax Withholding?

Repairmen, plumbers, contractors, and other businesspeople who provide their services as independent contractors, are generally not your employees. The I.R.S. also says that you don't have to withhold or pay Social Security and Medicare taxes from wages you pay to:

1. Your spouse,
2. Your child who is under age 21,
3. Your parent, unless an exception is met, or
4. An employee who is under age 18 at any time during the year, unless performing household work is the employee's principal occupation. If the employee is a student, providing household work isn't considered to be his or her principal occupation.

See I.R.S. Publication 926 for more information on these exceptions.

Which employees are subject to withholding and tax reporting rules?

Household workers are your employees (for tax purposes) if you can control not only the work they do, but also how they do it. Household employees include housekeepers, maids, babysitters, gardeners, and others who work in or around your private residence as your employee.

Compensation thresholds to know

If you will pay a housekeeper, cook, gardener, babysitter, or other household worker at least $2,600 in 2023 you have a duty to report and withhold their income and taxes. This amount includes any cash you pay for your household employee's transportation, meals, and housing. If you will pay at least $2,600 to 1 person, you have additional financial responsibilities.

You must meet those responsibilities to ensure your household worker gets credit toward Social Security benefits and Medicare coverage. When you pay at least $2,600 in wages to a household worker, you must do the following:

• Deduct Social Security and Medicare taxes from those wages.
• Pay these taxes to the Internal Revenue Service (IRS).
• Report the wages to Social Security.

If you paid cash wages of $2,600 or more for 2023 (this threshold can change from year to year) to any one household employee, you generally must withhold 6.2% of social security and 1.45% of Medicare taxes (for a total of 7.65%) from all cash wages you pay to that employee, unless you prefer to pay your employee's share of social security and Medicare taxes from your own funds.

You must also pay your share of social security and Medicare taxes, which is also 7.65% of cash wages (cash wages include wages you pay by check, money order, etc.). If you are going to do this reporting and calculation yourself (not recommended, I tell my clients to use a CPA or a payroll company) you can find the specified dollar amounts and percentages under the topic "Do You Need To Pay Employment Taxes?" in IRS Publication 926, Household Employer's Tax Guide. Pay the amount you withhold to the IRS with an additional 7.65% for your share of the taxes.

As always, this is a preliminary look at the only the most predictable, recuring and widely applicable risks; it cannot substitute for personalized counsel based on your facts with experienced CPAs, attorneys and insurance brokers.

Attorney Ike Devji has two decades of legal experience focused exclusively on asset protection, risk management and wealth preservation. He helps protect a national client base with more than $7 billion in personal assets, including thousands of entrepreneurs, business owners and physicians.