Employee or self-employed? It matters in the eyes of the tax law

Running your own business can feel like it takes more time than God created, and too often household tasks are sacrificed. Consequently, many people hire someone to help with various tasks, such as housecleaning, child care and yard work. While that may relieve the stress of completing those duties, it’s important to recognize the tax consequences of such hires.

The first thing to recognize is if you have hired someone to do household work and you control not only what work is done, but how it is done, you have a household employee in the eyes of the tax law.

On the other hand, if only the worker controls how the work is done, that person is not considered an employee, but is instead self-employed. Generally, a self-employed person will provide his or her own tools and offers services to the general public in an independent business.

Likewise, if an agency provides the worker and controls what work is done and how it is done, that person is also not your employee.

That said, if you do have a household employee, you are required to treat them as other employees for tax purposes.

  • FICA – If you pay cash wages of $2,000 or more in 2017 to any one household employee, you must withhold 6.2 percent of Social Security and 1.45 percent of Medicare taxes. As the employer, you must also pay your share of Social Security and Medicare taxes.
  • Federal Income Tax – You are not required to withhold federal income tax from wages paid to a household employee, but if the employee asks you to and you agree, you will need to complete a W-4 withholding form.
  • W-2 – You must complete a W-2 form for any employee for whom you have withheld Social Security and Medicare or federal income tax.
  • FUTA – Federal unemployment tax (FUTA) must be paid on the first $7,000 of cash wages paid to any household employee.
  • Form 1040 – A Form 1040 Schedule H must be filed if you have withheld any federal income tax or paid wages to a household employee subject to FICA or FUTA tax.
  • Estimated Tax Payments – You can either have your employer withhold more federal income tax from your wages during the year or you can make estimated tax payments each quarter to avoid owing taxes in the event you need to file a Form 1040 Schedule H.

Please let us know if you have any questions.

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