Hiring Household Help? Here's What You Need to Know About Taxes
Tips for Paying Household Employment Taxes
If you hire a nanny, a housecleaner, or a landscaper and you pay any of them more than $2,100 in 2018, then you'll need to pay employment taxes for that person. Commonly called the "nanny tax," this tax is the employer’s paid share of Social Security and Medicare taxes you'll withhold from the worker's pay, as well as federal unemployment tax.
The $2,100 threshold applies for calendar year 2018. The IRS typically raises the threshold each tax year.
Is Your Helping Hand an Employee?
The IRS notes that a household employee is someone you hire to do household work around your private home as long as you control not only what work is done but how it's done. It doesn't matter if the work is full-time or part-time or if you hired the worker through an agency or a list provided by an agency or association. Spouses, parents, or children under age 21 can't be considered employees.
For example, if you hire a babysitter and provide childcare instructions and your home as the workplace, then the babysitter is an employee and subject to the $2,100 threshold.
Some examples of household workers are:
- House cleaners
- Domestic workers
- Health aides
- Private nurses
- Yard workers
Services that aren't of a household nature, such as a tutor or secretary, are not covered by the nanny tax.
When an Employee Isn't an Employee
The amount of control you have over the work that your household professional does in your home determines if the IRS considers that person an employee. If the worker can control how the work is done, then the IRS considers the person self-employed and you won't need to pay employment taxes. Self-employed workers typically have their own tools and offer services to the general public in an independent business.
Say you hire a lawn care business to mow the grass. Since the business owners uses his own equipment and hires and pays any helpers, the business owner would be considered self-employed.
if you have any questions about whether your household worker is an employee or an independent contractor, fill out IRS Form SS-8. You'll answer about 20 questions about the nature of the work, and the IRS will get back to you with a formal ruling.
The Process for Handling Household Employment Taxes
Once you pay a household employee $2,100 or more per year (the baseline amount for calendar year 2018), you have the same tax withholding obligations as a business. Your employee will fill out a W-4, you'll withhold taxes, provide pay stubs, and file a Schedule H with your federal income tax return. Here's a step-by-step guide from the IRS:
Step 1: Determine If Your Employee Can Legally Work in the United Sates
Both you and your employee must complete the U.S. Citizenship and Immigration Services (USCOS) Form I-9, Employment Eligibility Verification no later than the first day of work. You don't need to submit the form to the IRS or any other government agency, but keep a copy for your records.
Step 2: Sign an Employment Contract With the Household Employee.
A sample contract appears on the Care.com HomePay site.
Step 3: Register With the IRS and the State
In order to set up any payroll and employment tax accounts, you'll need an employer identification number so that your payroll taxes can be processed correctly.
Step 4: Set Up Payroll and Taxes
Decide on the frequency of pay (such as weekly, biweekly, or semimonthly), select payroll accounting software (not required, but recommended), and, if desired, set up direct deposit and processes for issuing pay stubs.
You'll need to withhold and pay Social Security and Medicare taxes, known as FICA. The taxes are 15.3 percent of cash wages. If you split the taxes, you'll pay 7.65 percent and your employee pays 7.65 percent. Some employers elect to pay the entire 15.3 percent themselves and not withhold taxes from the employee. You'll also need to pay 6 percent unemployment tax up to $7,000 a year per employee. You may also need to pay state employment taxes. For a list of state unemployment tax agencies, visit the U.S. Department of Labor website.
At the end of the year, issue a Form W-2 to employees that reports their annual wages and tax withholdings. File Schedule H with Form 1040 to summarize the annual payroll taxes. You can also choose to pay quarterly estimated household employment taxes using Form 1040-ES.
You may want to hire an accountant to help you set up payroll processes and prepare your tax filings.
How Household Employment Taxes Benefit the Employee
Household employment taxes establish a work history for employees, entitling them to benefits such as Social Security and Medicare, and unemployment if they are laid off. In a few states, domestic workers are eligible for disability insurance if they are unable to work due to injury or illness.
A household employee who is misclassified as an independent contractor will have to pay the full FICA tax.
How Household Employment Taxes Benefit You
You may qualify for a tax credit by taking the child and dependent care tax credit on your personal 1040. The standard deduction for 2018 is $6,350 if you are single or married and filing singly, and $12,700 if you are married and filing jointly. If you itemize your taxes, your deduction may be higher or lower.
Also, if you have a child care flexible spending account, you can use up to $5,000 of pretax wage income to pay for dependent care expenses.
Household Employment Tax Link Directory:
On the IRS.gov Website
- Publication 926, Household Employer's Tax Guide
- Tax Topic 756, Employment Taxes for Household Employees
- Schedule H (Form 1040), Household Employment Taxes
- Publication 15 (Circular E), Employer's Tax Guide
- Hiring Household Employees
- Family Caregivers and Self-Employment Tax
- Tax Topic 602, Child and Dependent Care Credit
- Publication 503, Child and Dependent Care Expenses
- Form W-10, Dependent Care Provider's Identification and Certification (pdf, includes instructions)
- Form 2441, Child and Dependent Care Expenses
- Internal Revenue Manual, 20.2.12, Penalties and Interest on Employment Taxes