In our experience, families who treat their household employees professionally enjoy much longer and happier employer-employee relationships. That means, among other things, offering a formal approach to reviews and raises as well as bonuses. Just like other professionals, household employees should receive a review and raise at least once a year – even if it’s just a cost-of-living adjustment to keep up with inflation. Additionally, bonuses – whether it’s a holiday bonus, anniversary bonus or performance bonus – are considered part of the compensation package and, therefore, must be handled like all other forms of taxable compensation.

One question that arises frequently is whether or not it is legal for a family to give an employee a bonus and avoid taxes by calling it a “gift.” Anyone can “gift” money or other items of value to another individual and have it be non-taxable, up to an annual limit. However, the gift law does not apply to employment situations. Any item of value – if given to an employee – is considered taxable compensation and must be reported as such.