When you hire a care provider, you take on the role of employer -- taxes, insurance and all. By Laura Cohn, Associate Editor April 9, 2008 EDITOR'S NOTE: This article was originally published in the December 2007 issue of Kiplinger's Retirement Report. To subscribe, click here. When you hire a care provider for a spouse or parent, you can either go through an agency or strike out on your own. If you hire a caregiver yourself, you get to choose the person who you think will be the best fit for your family. One big downside: The paperwork can be overwhelming. You've heard about the "nanny tax," the complicated rules that apply to parents who hire someone to care for their children. Well, the same tax rules apply if you're hiring someone to care for a spouse or parent. You have to verify the caregiver's legal status, and you'll probably pay Social Security and Medicare taxes for your employee, and unemployment taxes, too. You'll also likely pay higher insurance costs. "You have to think like an employer," says Barbara Anderson, a lawyer at the Law Offices of Peter T. Straub, a law firm in Alexandria, Va. Advertisement A good place to start is the Household Employer's Tax Guide (Publication 926) at www.irs.gov. You'll find guidance on what taxes to pay, what forms to fill out and what records to keep when you become an employer. If you pay your caregiver less than $1,500, you don't have to worry about taxes. (That threshold rises $100 in 2008, to $1,600.) Pay more, though, and you'll owe 15.3% of the wages as Social Security and Medicare taxes. The amount is supposed to be split evenly between you and your employee (7.65% each). But it's up to you to pay the full amount when you file your income-tax return for the year. Whether you withhold Social Security and Medicare taxes from your employee's paycheck is up to you. Most employers don't withhold -- and then regret it when they have to come up with the dough at tax time. If you pay the worker $1,000 or more a quarter (in 2007 or 2008), you'll owe federal unemployment tax, typically 0.8% on the first $7,000. Contact your state tax authority to find out if you'll owe state unemployment tax, too. Ask the tax agency if you need to pay for worker's compensation and short-term disability insurance. As an employer, it's up to you to make sure the caregiver is a legal immigrant. Have him or her fill out the U.S. Citizen and Immigration Services Form I-9, Employment Eligibility Verification. Advertisement Benefit From Tax Breaks The good news: You can qualify for some tax breaks. If you're paying for care for a spouse or parent who can't take care of himself or herself -- and you have a job -- you can claim a tax credit worth 20% to 35% of the first $3,000 in cost. The IRS guide Child and Dependent Care Expenses (Publication 503) provides further details. You may also be able to deduct the cost of in-home services as a medical expense. But, the expenses must exceed 7.5% of your adjusted gross income. Beyond the tax implications, you need to check whether your homeowners insurance policy will cover the caregiver if an injury occurs. And if the care provider will be driving your car, make sure your auto policy covers that. "The responsible party has to be very careful to make sure all the risks are covered," says Robert Bullock, partner at the Elder & Disability Law Center, a law firm in Washington, D.C. One way to avoid all the paperwork is to hire a caregiver through an agency, which handles the worker's taxes and insurance for you. Gail Quigley, 65, whose 85-year-old husband, John, has Alzheimer's disease, uses a caregiver from Bethesda, Md.–based Life Matters. "They handle all the tax stuff," she says. "And if the person doesn't show up, they get you a backup." If you're determined to hire a caregiver on your own, it's a good idea to hire a tax adviser. Says Harry Wigler, a certified public accountant in Woodbury, N.Y.: "This is not a do-it-yourself project. You could end up being subject to penalties, interest or both."