Placement agency, staffing agency, or direct hire: who is the employer for tax purposes

Families looking for senior household staff often work through an agency. The word "agency" covers very different arrangements. Some agencies find a candidate, collect a fee, and step away. Others employ the worker and bill the family for the hours. The difference decides who files payroll returns, who issues the W-2, and who the IRS and the state look to if taxes go unpaid.

This post covers how the main agency arrangements are treated for tax purposes, what the household should get in writing, and the records each arrangement needs. It does not evaluate or recommend any agency, and it is not advice on how to search for or select staff. Contracts with agencies are a matter for counsel.

The question the IRS asks

For a household worker, the IRS asks who controls what work is done and how it is done. IRS Publication 926 addresses agencies directly: if an agency provides the worker and controls what work is done and how it is done, the worker is not your employee. If the family directs the work, the family is usually the employer, regardless of who found the worker.

A useful test is to ask who does each of these:

• Sets the schedule and assigns daily tasks
• Trains the worker on how the household runs
• Can end the engagement with this worker
• Pays the worker and withholds taxes
• Provides workers' compensation coverage

If the answer to most is the family, the family is the employer.

Three common arrangements

Placement agency (finder)

The agency recruits and screens candidates and charges a placement fee, often a percentage of first-year salary, sometimes with a replacement guarantee. After placement, the worker is hired by the family, and the family runs payroll. This is the most common arrangement for full-time household managers, nannies, and estate staff.

Tax consequences:

• The family is the employer from the first day: EIN, Schedule H or business payroll returns, state accounts, and W-2.
• The placement fee is a personal expense and is not deductible for household work. If the hire is for a business, the fee is generally deductible by the business that employs the worker.
• The agency does not issue a W-2 or withhold anything. Many families assume otherwise.

Staffing agency (employer of record)

The agency employs the worker, runs payroll, provides workers' compensation, and bills the family an hourly or weekly rate that includes wages, taxes, and its margin. Temporary or relief staff are often provided this way.

Tax consequences:

• The agency files payroll returns and issues the W-2.
• The family has no Schedule H for that worker, as long as the agency, not the family, actually controls the work.
• If the family in practice sets the schedule, directs the work, and keeps the same worker for years, the arrangement can look like the family is the real employer. Ask whether the contract and the facts match.

Registry or referral service

A registry lists independent workers, such as caregivers or private chefs, and charges a fee for referrals. The registry is not the employer. The worker may be the family's employee or, in limited cases, a true independent contractor with their own business. The family has to decide classification on its own.

Professional employer organizations

Some families with business entities use a professional employer organization (PEO) for household staff. A certified PEO (CPEO) that is certified by the IRS takes on federal employment tax liability for wages it pays under a qualifying contract. A non-certified PEO generally does not, so the family or its entity remains liable if the PEO fails to remit. Ask whether the provider is a CPEO, and keep the contract.

Payroll services are not employers

A household payroll service calculates pay, files returns, and makes deposits on the family's behalf. It is the family's agent, not the employer. If a payroll service fails to deposit taxes, the IRS and the state look to the family. Confirm deposits through the family's own IRS online account or EFTPS records each quarter, and keep copies of every return the service files.

Contractors who really are contractors

Some household services are provided by independent businesses: a cleaning company with its own staff and many clients, a landscaping firm, an event caterer. These are usually not employees. For personal household services, the family generally does not issue Forms 1099-NEC, because the 1099 rules apply to payments made in the course of a trade or business. If a business pays the vendor, the business may need a Form W-9 and a 1099-NEC when payments reach $2,000 in 2026.

What to get in writing from any agency

• Whether the agency is the employer of record, or only a placement or referral service
• Who withholds and pays federal and state payroll taxes
• Who provides workers' compensation coverage
• What the fee covers, when it is due, and any refund or replacement terms
• For employer-of-record arrangements, which state accounts the agency uses for the worker
• For PEOs, whether it is IRS-certified

Signing bonuses, relocation, and other first-year payments

Agency placements for senior staff often come with extra first-year costs. Each has its own treatment:

• Signing bonuses paid to the worker are wages, reported on the W-2 of whoever employs the worker, with payroll tax withheld.
• Relocation payments, whether paid to the worker or directly to movers, are taxable wages. The exclusion for moving expense reimbursements was suspended in 2018, and the 2025 law made that permanent for everyone except members of the armed forces and certain intelligence community employees.
• Temporary housing provided while the worker settles in is generally wages unless it meets the on-premises lodging rules.
• Background check and agency fees are costs to the family, not income to the worker.

If an agency passes any of these through on its invoice, ask whether the agency treated them as wages to the worker. If it did not, and the family is the employer, they belong on the family's payroll.

The scored diagnostic

Score each item 0, 1, or 2. Zero means unknown. One means assumed. Two means confirmed in writing.

Item	0, 1, or 2
The agency's role (placement, employer of record, or registry) is in the contract
The employer for tax purposes is identified for each worker
Payroll tax responsibility is stated in writing
Workers' compensation responsibility is stated in writing
Day-to-day control matches the contract
Payroll service deposits are verified on the IRS account
PEO certification status is confirmed, if one is used
Placement fees are recorded with the right payer, personal or business

A total of 13 to 16 means the employer question is settled. A total of 8 to 12 means one assumption may be wrong. Below 8, review the contracts with your preparer before year end.

Illustrative: a placed house manager and a relief agency

Illustrative: A family hires a house manager through a placement agency for a fee of 20% of first-year salary. The family runs payroll from day one and files Schedule H for 2026. The fee is a personal expense and is not deducted. During the house manager's vacations, a staffing agency provides relief staff, employs them, and bills the family weekly. The family keeps the staffing agency contract, which says the agency is the employer of record and provides workers' compensation. Because the relief staff are short term and the agency assigns and supervises them, the family does not include them on Schedule H.

When the facts change

Arrangements drift. A relief worker from a staffing agency becomes the regular weekend employee. A placed worker starts also doing tasks for the family business. A registry caregiver ends up working 50 hours a week on the family's schedule for two years. Review each worker's status once a year, at the same time as your fall tax review, and tell your preparer if anything changed.

Who owns what

• The household: the contracts and the facts of day-to-day control.
• Your preparer: the classification analysis and whether a fee is deductible.
• The payroll provider or agency: filings and deposits under the contract.
• Counsel: agency contracts and employment law questions.

Next step: pull every agency contract the household has signed, and write next to each one who the employer is and who pays the payroll taxes.

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Educational only. This is not tax or legal advice for your situation. Consult your own CPA, EA, or attorney before acting.