Expert Commentary

Homecare Workers: Identifying and Managing Risks

Our population is aging. Baby boomers are just hitting retirement now. With people starting to live longer, home care is often essential for many people before they pass away. Homecare agencies are popping up all over the place.


Personal Risk Management
June 2011

Some agencies hire employees and pay their work compensation and everything else that goes with it. Other agencies strictly send their people 1099s and call them independent contractors. These workers do not have workers compensation insurance if they get injured on the job.

Many elderly home owners needing care assistance often hire "sole proprietors" who are not sent by an agency but strictly work for themselves. Rarely do these individuals carry either liability or workers compensation insurance on themselves. This article addresses additional risks resulting from hiring a homecare aide either as a sole proprietor or as an independent contractor of an agency.

Going the Agency Route

The safest way to avoid tax responsibilities, workers compensation obligations, and other employment-related risks is to avoid the risk completely by hiring a homecare aide from an agency that pays this person as an employee of the agency. The other big advantage of this approach is that an agency can provide a backup aide in the event of illness. The big disadvantage of this particular strategy is that it is often the most expensive alternative.

I recommend that you generally avoid working with homecare agencies that do not treat their workers as employees but rather as independent contractors. Otherwise, you pay the higher price of an agency but are still vulnerable to potential workers compensation claims, Internal Revenue Service (IRS) fines and penalties, etc.

The Risks of Hiring an Individual

As a home owner, you can avoid many risks by paying the aide as an employee. This will involve payroll and withholding taxes, having a workers compensation policy in place to cover job-related injuries if your state requires it,1 and carrying basic and excess employers liability coverages. (Note: Most personal umbrella policies do not include excess employers liability coverage, so make sure yours does or change insurers if necessary.) If your state doesn't require you to carry workers compensation on your domestic household, then you'll only have to worry about withholding and paying payroll taxes.

What if you decide to go cheap, take fewer risks, and hire a homecare aide as an independent contractor instead of as an employee? How bad a decision would that be? Depending on your state, you may not be required to carry workers compensation anyway. Let's assume that you are required to do so in your state. Here are some consequences:

  • Assume your aide is seriously hurt in a fall on loose steps and sues you for negligence.

    Medical bills = $150,000

    Five years of lost wages = $200,000

    Economic value of pain and suffering = $400,000

    Your defense costs = $150,000

    Your total out-of-pocket costs = $900,000

    Your net costs after insurance reimbursement = $900,000! Why? Because, by not carrying workers comp coverage as required by law, your aide is no longer barred from suing you for negligence. The homeowners and umbrella liability coverages exclude any claims for injuries where the insured was obligated to carry work comp and failed to do so.

  • Assume the same circumstances except the fall was solely the fault of the aide—no home owner negligence. This time, the home owner owes what the workers comp policy would have paid had there been one in force.

    Medical bills = $150,000

    Five years of lost wages = $200,000

    Lump sum for permanent partial disability = $100,000

    Legal costs = $75,000

    State fines and penalties for not carrying the coverage = $50,000

    Total out-of-pocket costs = $575,000! (No insurance reimbursement because home and umbrella policies universally exclude mandated work comp benefits.)

In both of these examples, the #1 rule of risk management was broken: Don't risk more than you can afford to lose!

The IRS May Assess You Taxes and Penalties

If you've hired someone and paid them as an independent contractor without doing any tax withholding, and if the IRS determines the independent contractor actually should have been considered your employee, you could owe back payroll taxes, plus be subject to substantial fines and penalties. To find out whether your worker should be your employee according to the IRS, go to the IRS website and download publication 926—Household Employer's Tax Guide, or call 1–800–829–1040.

Be careful. Even if your state exempts you from work comp obligations, you won't be exempt from IRS payroll tax.

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*This article originated from a question I received from agent Paul McShane Jr. of Newtown Square, Pennsylvania. Thank you, Paul, for your permission to quote parts of your question.


1See the state department of labor for individual state requirements. (If you subscribe to the IRMI Personal Risk Management and Insurance reference service, see the section on State Workers Compensation Laws and Domestic Workers.) In Minnesota, for example, you are not required to carry work comp coverage on domestics if you will be paying an aide less than $1,000 in a 3-month period this year or paid an aide less than $1,000 over 3 months last year. In Washington, you don't have to insure domestic employees unless you have two or more employees working 40 or more hours a week.


Jack Hungelmann's book Insurance for Dummies, contains much of this information and is available at your favorite bookstore or online. For more information on his risk management and insurance business, go to www.JackHungelmann.com where you can check out sample newsletters, brochures, other articles written on various issues. For background information, see Mr. Hungelmann's biography.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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