You may have heard of the “nanny tax”. But did you know it doesn’t just apply to nannies? The correct term of the nanny tax is actually the Household Employee tax. Did you hire someone to do some housekeeping or yard work? Do you have an elderly parent in your home who needs a caregiver during the day? These workers could be considered a household employee if they work in or around your home, you control the work that is done as well as how it is done, you provide all the necessary tools and supplies required for the work, and the worker does not provide services to the general public as an independent business. It doesn’t matter if the worker is full or part time, or if they are paid hourly, daily, weekly, or by the job.
Examples of household employees include:
- Senior Caregivers
- Personal Assistants
There are a few exceptions. Payments to the following are not considered payment to household employees:
- Your spouse
- Your child under the age of 21
- Your parent caring for your child (subject to certain exceptions)
- Any worker under the age of 18 at any time during the year.
Social Security, Medicare, and FUTA tax
In 2020, If your household worker earns cash wages of $2,200 or more (excluding the value of food and lodging) you are required to submit Social Security, Medicare, and FUTA taxes. The social security tax rate is 6.2% of wages up to $137,700 (maximum wages subject to social security tax in 2020) each for the employee and employer. You’re responsible for payment of your employee’s share of the taxes as well as your own. You can either withhold your employee’s share from the employee’s wages or pay it from your own funds. If you do, your payments aren’t counted as additional cash wages for Social Security and Medicare purposes. However, your payments are treated as additional income to the worker for federal tax purposes, so you must include them as wages on the W-2 form that you must provide.
You also must pay FUTA tax if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter. FUTA tax is 0.6% and applies to the first $7,000 of wages paid and is only paid by the employer. You may also owe state unemployment tax. To find out whether you will owe state unemployment tax, contact your state’s unemployment tax agency.
Federal and State Income Taxes
You’re not required to withhold federal income tax from wages you pay a household employee. You should withhold federal income tax only if your household employee asks you to withhold it and you agree. The employee must give you a completed Form W-4.
Reporting and Paying
You pay household employee tax obligations by one of three ways:
- Increasing withholding from you own wages
- Making quarterly estimated payments
- Paying the entire amount with your personal tax return by April 15th
As a household worker employer, you don’t have to file employment tax returns, even if you’re required to withhold or pay tax. Instead, employment taxes are reported on your tax return on Schedule H.
Keep related tax records for at least four year from the later of the due date of the return or the date the tax was paid. Records should include the worker’s name, address, Social Security number, employment dates, dates and the amount of wages paid and taxes withheld, and copies of forms filed.
Steps to Take Upon Hiring a Household Employee
- Apply for a Federal Identification number for tax filings. If you do not have one, you may apply online at www.irs.gov. You may also call the IRS, fax, or mail Form SS-4 to the IRS.
- Have your employee provide their social security number and fill out form I-9, Employment Eligibility Verification, and form W-4 if they wish to have federal tax withheld.
- Calculate and track payroll
- File quarterly state returns and make estimated payments
- File year end returns.
Forms W-2 and W-3 are due by January 31st. Schedule H is due by the 1040 due date.
For further information, refer to Internal Revenue Service Publication 926, Household Employer’s Tax Guide available at www.irs.gov and contact a competent tax advisor for assistance.