What You Need To Know About Household Employee Taxes

Tips for Paying Household Employment Taxes

A nanny being interviewed with a baby on her lap
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Anyone who pays a nanny, a housekeeper, a landscaper, or another worker to perform jobs around their home must pay household employee taxes on behalf of that individual. Commonly known as the "nanny tax," this is the employer's share of the worker's Social Security and Medicare taxes, as well as federal unemployment tax.

You must pay household employee taxes on behalf of anyone to whom you pay $2,400 or more a year as of tax year 2022. This is up from $2,300 in 2021 if you must make payments after year's end because you didn't know about this rule. The IRS raises the annual total payments threshold each tax year to keep pace with inflation.

Key Takeaways

  • A household employee is someone who works in your home and whose work you control. You provide any supplies and equipment they might need.
  • Household employers must have their workers complete Forms I-9 to establish that they're legally able to work in the U.S.
  • You must pay Social Security and Medicare taxes on behalf of household employees you pay $2,400 or more in 2022.
  • You must also pay the 6% federal unemployment tax, but you might get a credit if you also pay an unemployment tax to your state.

The Definition of an Employee

According to the IRS, a household employee is someone you hire to do household work at your private home if you control what work is done and how it's accomplished. It doesn't matter if the work is full-time or part-time, or if you hired the worker through an agency or privately.

A babysitter is an employee and is subject to the $2,400 threshold in 2022 if you pay them, provide instructions as to how they should care for your children, and if your home is the workplace. They care for your children under your roof, not at a separate childcare facility.

Common household workers include:

  • Babysitters
  • Caretakers
  • Butlers
  • Cooks
  • House cleaners
  • Domestic workers
  • Chauffeurs
  • Health aides
  • Housekeepers
  • Nannies
  • Private nurses
  • Yard workers

Services that aren't of a household nature, such as tutoring or secretarial work, aren't subject to the nanny tax. Minors under the age of 18 aren't considered to be employees if they're still in school. Their "profession" is that of a student.

When an Employee Isn't an Employee

The amount of control you have over the work that your household professional performs also determines whether the IRS considers that person to be an employee or an independent contractor. The IRS indicates that a worker is self-employed if they control how the work is done. This relieves you of the obligation to pay employment taxes.

Self-employed workers use their own tools and equipment. They offer services to the general public. They often have more than one customer or client. You might hire a lawn care business to mow your grass once a week. The business owner uses their own equipment. They probably hire and pay their own helpers, so the business owner would be considered self-employed.

Tip

You can fill out and submit Form SS-8 to the IRS if you have any questions about whether your household worker is an employee or an independent contractor. The form asks about 20 questions regarding the nature of the work being performed. The IRS will get back to you with a formal ruling.

Process for Handling Household Employment Taxes

You have the same tax withholding obligations as any business when you pay a household employee $2,400 or more. Ask your employee to fill out a Form W-4. You'll withhold taxes, provide pay stubs, and file Schedule H with your federal income tax return. You'll have to see to a few additional tasks as well.

Make Sure Your Employee Can Legally Work in the U.S.

Both you and your employee must complete the U.S. Citizenship and Immigration Services (USCIS) Form I-9, "Employment Eligibility Verification," no later than the first day of work. The employee must provide you with documentation that proves their identity and that they're legally able to work in the U.S. Acceptable documents include a U.S. passport, Social Security card, driver's license, or other state ID.

A full list of acceptable documents can be found on the last page of Form I-9. You can access it on the USCIS website.

Register With the IRS and the State

You'll need an employer identification number (EIN) to set up payroll and employment tax accounts so your taxes can be processed correctly. The IRS makes this part easy.

You can register for an EIN online at the IRS website from 7 a.m. to 10 p.m. Eastern Standard Time, Monday through Friday. You'll need a valid Social Security or Individual Tax ID Number.

Set Up Payroll and Taxes

Decide how often you're going to pay your employee, such as weekly, biweekly, or semimonthly. Select payroll accounting software. It's not required, but it can be a big help. Set up direct deposit and processes for issuing pay stubs. Again, direct deposit isn't required. But it's easier, and your employee will thank you for it.

You must withhold Social Security and Medicare taxes from your employee's pay and remit them to the federal government. These taxes are 15.3% of wages paid combined. You must pay 7.65%, and your employee pays 7.65%. The Social Security tax is 6.2% for each of you. The Medicare tax is 1.45%.

Only wages paid up to $147,000 a year are subject to the Social Security tax as of 2022. This is up from $142,800 in 2021. This threshold is referred to as the wage base. It applies only to Social Security, not Medicare. You can stop withholding Social Security for the rest of the year when you've paid your worker this much. But you must start withholding again in January.

Note

Some employers elect to pay the entire 15.3% themselves and not withhold taxes from the employee.

You must also pay a 6% federal unemployment tax (FUTA) on the first $7,000 a year paid to your employee as of 2021 and 2022. But you might be eligible for a credit of up to 5.4% if you also pay a state unemployment tax. Visit the U.S. Department of Labor website for a list of state unemployment tax agencies.

Give your employee a Form W-2 at the end of the year that reports their annual wages and tax withholdings. File Schedule H with your own Form 1040 to summarize the annual payroll taxes. You can also choose to pay quarterly estimated household employment taxes using Form 1040-ES.

The legal process of hiring a nanny can sometimes be complex. You might want to hire an accountant through a nanny payroll service to help you set up processes and prepare your tax filings.

Benefits for the Employee

Household employment taxes establish a work history for your employee so that they can collect benefits such as Social Security, Medicare, and unemployment compensation if they're laid off. Domestic workers are also eligible for disability insurance in a few states if they're unable to work due to injury or illness.

Frequently Asked Questions (FAQs)

What should I do with Form I-9 after my employee has completed it?

You should verify the information contained in the form before your employee begins working for you. You don't have to submit the form to the IRS or to any other government agency, but you should keep a copy for your records.

What if I don't pay household employment taxes?

The government will become aware that you didn't pay the required taxes if you set up an account and don't make tax payments or if your worker files for unemployment or Social Security benefits. You'll have to pay the taxes eventually, and most likely interest and penalties as well. There's no statute of limitations.

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