Are You Deducting Your Housekeeper?

When you have a home-based business, time is truly precious. Sure, you have the flexibility to do things that people who work a nine to five job can’t do, and have the several home office deductions available, but you also often wind up working much longer hours, too. By the time you’re done working, there’s so little precious time to spend with family, the last thing you want to do is clean the house.

For many small business owners, a housekeeper is just the solution they need. Not only that, if you have a home office where you have customers or clients visit you, you want to make sure everything is tidy and presentable. Keeping your office in top shape is a legitimate business expense. That means tax implications.

Household Employee or Independent Contractor?

The first thing you need to do is figure out if the housekeeper is your employee or if she’s an independent contractor. If you hire her through an agency, she’s the latter; if not, it may be a little more complex. (The IRS offers a guide on determining whether you have a household employee, and what your employment tax obligations might be.)

The long and short of it is this: if you have a household employee, you’re going to be paying employment taxes, and possibly withholding federal income taxes. If you have a contractor, you don’t have to worry about those things. In both cases, you can deduct some or all of your expenses. Home office deductions like these can greatly ease your small business’ tax liability.

If you incorrectly classify an employee, you can be looking at some serious penalties from the IRS. You need to make sure and thoroughly discuss the housekeeper with your tax professional so that you know which category he falls into. The same goes for taking out employment taxes if he does fall into the “household employee” category, otherwise, you could be looking at having to pay back taxes as well as fees.

Home Office Deductions – Expenses

If you’re already claiming business use of your home, you’ll have a much easier time of claiming a deduction for your housekeeper. The key is this: the same percentage of your home that’s being used for business is the same percentage of the expense you can claim for the housekeeper.

If you’re not claiming any home office deductions, you’re going to have a harder time claiming your housekeeper as a business expense. In fact, for most people, even if you own a small business and do some work at home, if you’re not claiming a home office deduction you might be hard-pressed to convince the IRS that the housekeeper is in some way performing work that is integral to your business.

An exception to this, of course, is if the housekeeper only cleans the portion of your home used for business. If you can prove that this is the case (a written contract with the housekeeper detailing what area is to be cleaned usually suffices) then you may be able to deduct the entire cost.

Working Parents Credit

There is another home office deduction in which may allow you to deduct the cost of your housekeeper. If you pay someone to clean your house, take care of your child, cook, or perform related tasks so that you can work or so that you can look for work, you may qualify for a credit for child and dependent care expenses. There are a number of restrictions on how this works, including family size and income, so make sure you talk to your tax professional about whether you qualify under this scenario.

This credit can cover up to 20 to 35 percent of the cost of your housekeeping, so it’s not going to allow you to deduct the entire expense. However, every little bit helps, and if you qualify you should absolutely take advantage of it.

The Bottom Line on Deducting Your Housekeeper

It all boils down to this: if you have a home office, claim home office deductions, or if you have dependent children and meet certain income guidelines, you may be able to deduct a certain portion of the expenses you pay for your housekeeper.

Along the way, making sure you correctly classify your housekeeper is essential to avoiding trouble with the IRS. If she’s an independent contractor, she’ll have her own cleaning supplies, and she’ll probably have other clients or work for an agency. If not, and if you give specific directions about how the work is to be done, she’s probably a household employee instead.

Questions about home office deductions? Talk with a Certified Tax Coach today.

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