A simple hire could prove to be complicated
Do you hire helpers to care for your children or do household cleaning? What about hiring someone to maintain your lawn and garden? Do you pay them cash or “under the table?” Do you know that the IRS has rules on how much you can pay these helpers before you must report their earnings and pay FICA?
A household employee is someone who is hired to do any work in or around the home. To be considered a household employee, the “employer” can control not only what work is done but how it is done. Household employees can be babysitters, housekeepers, yard workers, caretakers, etc. Note that childcare services performed by a worker in his or her own home are generally not considered 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 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 does request that the employer withhold then the employer is required to have the household employee to fill out a Form W-4.
FICA: Employers who employ household employees who earn more than $1,900 a year are required to withhold and pay FICA taxes. Once the employee has reached the $1,900 threshold the entire amount is subject to FICA taxes not just the excess. The $1,900 a year or more requirement excludes the value of food and lodging. The employer portion of FICA for 2015 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. In other words, the employer must pay this 7.65 percent of the withholding amount and the employee also must 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 who is under the age of 18 and is a student. 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, the employer may be required to withhold and pay FICA taxes, depending on the employer’s marital status.
FUTA: Employers who employ household employees who are paid $1,000 or more in wages a year 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 percent, but credits reduce this rate to 0.6 percent in most cases. The 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.
Reporting: 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, however, to file a state return. Instead of filing a federal return, the employer can just report the employment taxes on the 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), which can be obtained 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 2015 are subject to FICA then the W-2 is due by Jan. 31, 2016. Additionally, a W-2 must be filed by Feb. 29, 2016 (or March 31, if filing electronically), with the Social Security Administration.
The following examples should help clarify these rules:
Example 1: You hire 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 3 days a week and care for your child. You provide Jane with specific instructions and supplies for caring for your child. Jane would be considered a household employee.
The really expensive issue comes up when you have a household employee for whom you did not report wages and withhold taxes (due to their request or your oversight) who later goes to file for Social Security. When they find out that they have no wage history and are therefore entitled to low or no benefits, you can expect a large bill for taxes, interest, and penalties for all unpaid years.
Please contact us should you have any additional questions regarding the withholding and remitting payroll taxes for household employees.