Do you hire helpers to care for your children or to do household cleaning? What about hiring someone to maintain your lawn and garden? Do you pay them in cash? Did you know that the IRS has rules on how much you can pay these helpers before you must report their earnings and pay Social Security and Medicare?
The ease of paying someone to help with household duties can actually be more complicated than originally thought.
A household employee is someone who is hired to do any work in or around the home. To be considered a household employee for tax purposes, the “employer” can control not only what work is done but how it is done. Household employees can be babysitters, caretakers, housekeepers, drivers, health aides, maids, nannies, private nurses, yard workers, etc.
Note if only the worker can control how the work is done, then the worker is not your employee but is self-employed. A self-employed worker usually provides his or her own tools and offers services to the general public in an independent business.
A worker who performs childcare services for you in his or her home generally is not your employee. If an agency provides the worker and controls what work is done and how it is done, the worker is not your employee. The following are some examples of who would or would not be considered a household employee.
Example 1: You hire and pay John Doe to care for your garden. John runs a garden care business and offers his services to the general public. He provides his own tools and supplies. John also has his own crew of workers that he pays to assist him. Neither John nor his employees would be considered household employees.
Example 2: You hire and pay Jane Doe to come to your house three days a week and care for your child. You provide Jane with specific instructions and supplies for taking care of your child. Jane would be considered a household employee.
Bear in mind the following when hiring a household employee:
- Employment eligibility verification
When an employer hires a household employee to work on a regular basis, the employer and employee are required to complete the U.S. Citizenship and Immigration Services Form I-9, Employment Eligibility Verification. This form should be filled out no later than the first day of work.
The employee must complete the employee section and provide certain required information and attest to his or her work eligibility. The employer must complete the employer section by examining documents presented by the employee as evidence of his identity and employment eligibility. The employer can find acceptable documents to establish identity and employment eligibility listed on Form I-9.
- Federal income tax
Employers who hire household employees are not required to withhold federal income taxes from the employee’s pay. However, if the employee requests the employer to withhold and the employer agrees then the employer would have to have the household employee to fill out a Form W-4.
- Social Security and Medicare Taxes (FICA)
Employers who employ household employees that earn more than $2,000 or more a year are required to withhold and pay FICA taxes. Once the employee has reached the $2,000 threshold, all cash wages you pay to that employee during 2016 up to $118,500 are Social Security wages. All cash wages are medicare wages.
Cash wages exclude the value of food and lodging. The employer portion of FICA for 2016 is 6.2 percent for social security tax and 1.45 percent for Medicare tax. The employee’s portion is the same as the employer’s portion. The employer must pay 7.65 percent of the withholding amount and the employee must also pay 7.65 percent for a total of 15.3 percent.
There are some exceptions to the household employee requirements. Employers are not required to withhold and pay FICA taxes on wages paid to their spouses, their children, their parent, or any employee under the age of 18. However, if the employer pays their parent who cares for their child who is either under the age of 18 or has a physical or mental condition requiring personal care then depending on the employers marital status they may be required to withhold and pay FICA taxes.
- Federal Unemployment Tax (FUTA)
Employers who employ household employees that are paid wages of $1,000 or more in a calendar quarter must pay FUTA tax. The FUTA tax applies to the first $7,000 of wages paid in a calendar year. The maximum FUTA tax rate is 6.0 percent. Credits, if applicable, can reduce this rate to 0.6 percent in some cases. FUTA tax is only paid by the employer and not the employee, so it should not be withheld from the employee’s wages. Additionally, depending on the state, regulations may also require employers to pay state unemployment tax (SUTA) as well.
Employers of a household employee do not have to file any of the federal employment tax returns, even if they are required to withhold or pay tax (unless the employers own a business). Please note that an employer may be required to file a state return. Instead of filing a federal employment tax return, the employment taxes can be reported on the employer’s individual tax return, Form 1040, Schedule H. In order to include the amounts on the Form 1040 the employer will need an employer identification number (EIN). The employer can obtain an EIN by filing Form SS-4.
If the employer is a sole proprietor, the employer can include taxes for the household employee on the FICA and FUTA forms 940 and 941 that are filed with the business. The business EIN can be used to report the taxes for the household employees.
The employer is also required to provide the household employee with a Form W-2. If the wages for 2016 are subject to FICA then the W-2 is due by Jan. 31, 2017. Additionally, you must file a W-2 with the Social Security Administration by Feb. 28, 2017 (March 31, if filing electronically).
Please contact us should you have any additional questions regarding the withholding and remitting payroll taxes for household employees.