December 8, 2014
Household Employee Wage Reporting – Are You Liable?
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On December 22, 2017, The Tax Cuts and Jobs Act was signed into law. The information in this article predates the tax reform legislation and may not apply to tax returns starting in the 2018 tax year. You may wish to speak to your tax advisor about the latest tax law. This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
If you employ someone who works in your home, you may be subject to household employment taxes. This tax is sometimes referred to as the “Nanny Tax,” which is misleading because it also applies to a nurse, caregiver, maid, gardener, etc. This is the same tax that you may have read about where some politicians and people in high places have been brought to task for avoiding.
Not all those hired to work in a taxpayer’s home are considered household employees. For example, an individual may hire a self-employed gardener who handles the yard work for a taxpayer and other residents in the neighborhood. The gardener supplies all the tools and brings in other helpers needed to do the job. Under these circumstances, the gardener isn’t an employee, and the person hiring him/her isn’t responsible for paying employment taxes. Another example of a worker who is not considered a taxpayer’s employee is one who comes from an agency (if the agency is responsible for the work and how it is done).
It depends greatly on the circumstances, and the amount of control that the hiring person has over the job and the hired person, on whether or not a household worker is considered an employee. Ordinarily, when someone has the authority to tell a worker what needs to be done and how the job should be done, that worker is considered an employee. Having a right to discharge the worker, supplying tools and providing the place to perform a job are primary factors that show control.
Contrast the following example to the self-employed gardener described earlier. The Smith family hired Lynn to clean their home and care for their three-year old daughter, Lori, while they are at work. Mrs. Smith gave Lynn instructions about the job to be done and how to do the various tasks; she, rather than Lynn, had control over the job. Under these circumstances, Lynn is a household employee, and the Smiths are responsible for withholding and paying certain employment taxes for her. It would not matter whether Lynn worked full- or part-time, nor whether the job was paid on an hourly, daily, weekly or per-job basis. Lynn would still be the Smiths’ employee.
You are not required to withhold federal income taxes if you employ someone who is subject to the “Nanny Tax.” However, income taxes can be withheld if your employee asks you to do so and you are willing to do the additional paperwork and make the required payroll deposits.
In addition to withholding the employee’s share of the FICA, you, as an employer, are responsible for paying a matching amount. The FICA tax is divided between social security and Medicare. The social security tax rate is 6.2%, and the Medicare tax rate is 1.45%. These rates apply to both the employee and employer for a total tax rate of 15.3%.
Example for 2015: You pay your employee $500 a week and do not withhold income tax. You must withhold a total of $38.25 ($500 x 6.2% plus $500 x 1.45%) for your employee’s share of FICA. Thus, your employee’s net paycheck would be $461.75 ($500 - $38.25). In addition, you must match the $38.25 for a total FICA tax of $76.50.
While unlikely that the annual compensation of any one of your household employees would exceed $200,000, you should be aware that in the event that it does, the employee’s share of the Medicare tax rate increases to 2.35% of the income over $200,000 for that year. The employer’s Medicare tax rate is not increased.
As an employer, you are also required to pay FUTA (federal unemployment) taxes if a total of $1,000 or more in cash wages (excluding the value of food and lodging) is paid to your employees in any calendar quarter of the year. This tax (maximum rate is 6.2%) applies to the first $7,000 of wages paid.
As a household employer, you generally are not required to file any of the usual employment tax returns that a business must file. Instead, obtain an employer identification number (EIN) from the IRS and include payment with your individual tax return (1040) using a Schedule H. However, if you own a business as a sole proprietor in which you have employees, you may include the taxes for your household worker(s) on the FICA and FUTA forms (Forms 940 and 941) that are filed for your business. In that case, the EIN from your sole proprietorship is used to report the taxes for your household employee(s).
You are also required to provide your employee with a Form W-2, if the employee’s wages are subject to FICA or income tax withholding, and file the W-2 with the Social Security Administration. It is also your responsibility to file the appropriate employment-related forms for your state of residence. And while not a tax matter, those individuals hiring a household worker must verify that the employee can legally work in the U.S., and then complete and retain the U.S. Citizenship and Immigration Services’ Form I-9.
Generally, a deduction is not allowed on your income tax return for the household employment taxes paid. However, if the wages paid to a household worker are for qualifying medical care of yourself, your spouse or dependents, or if the payments are eligible for the credit for child and dependent care expenses, you may include your portion of the employment taxes (in addition to the wages) when figuring the medical deduction or child/dependent care credit.
The reporting requirements for the “Nanny Tax” can be complicated. Please contact us if you need assistance or have questions.
Not all those hired to work in a taxpayer’s home are considered household employees. For example, an individual may hire a self-employed gardener who handles the yard work for a taxpayer and other residents in the neighborhood. The gardener supplies all the tools and brings in other helpers needed to do the job. Under these circumstances, the gardener isn’t an employee, and the person hiring him/her isn’t responsible for paying employment taxes. Another example of a worker who is not considered a taxpayer’s employee is one who comes from an agency (if the agency is responsible for the work and how it is done).
It depends greatly on the circumstances, and the amount of control that the hiring person has over the job and the hired person, on whether or not a household worker is considered an employee. Ordinarily, when someone has the authority to tell a worker what needs to be done and how the job should be done, that worker is considered an employee. Having a right to discharge the worker, supplying tools and providing the place to perform a job are primary factors that show control.
Contrast the following example to the self-employed gardener described earlier. The Smith family hired Lynn to clean their home and care for their three-year old daughter, Lori, while they are at work. Mrs. Smith gave Lynn instructions about the job to be done and how to do the various tasks; she, rather than Lynn, had control over the job. Under these circumstances, Lynn is a household employee, and the Smiths are responsible for withholding and paying certain employment taxes for her. It would not matter whether Lynn worked full- or part-time, nor whether the job was paid on an hourly, daily, weekly or per-job basis. Lynn would still be the Smiths’ employee.
You are not required to withhold federal income taxes if you employ someone who is subject to the “Nanny Tax.” However, income taxes can be withheld if your employee asks you to do so and you are willing to do the additional paperwork and make the required payroll deposits.
You are required to withhold and pay FICA (social security and Medicare) taxes if your household worker earns cash wages of $2,000 or more (excluding the value of food and lodging) during the calendar year (amount is for 2016 and 2017; call for threshold amount for other years). If you reach the threshold, the entire wages (not just the excess) will be subject to FICA. However, if your employee is under age 18 and the services are not the employee’s principal occupation, you don't have to withhold FICA taxes. For example, there is no FICA tax liability for the services of an employee, who is a student younger than 18 years old and babysits or mows the lawn on a part-time basis. On the other hand, if the employee is under age 18, and the job is the employee’s principal occupation, you must withhold and pay FICA taxes when the threshold is exceeded.
If there is some uncertainty as to whether your household employee’s earnings will be under the withholding threshold, you should withhold the FICA from the beginning of the employment. If it turns out that the threshold is not met, then the withholding can later be refunded to the employee. On the other hand, if you did not withhold initially and the employee’s wages do reach the threshold, make up amounts can be withheld from the pay later on. This may create a problem in that the employee won’t appreciate large unexpected withholding amounts from his or her subsequent pay. You have the option of paying the FICA withholding yourself, but it must be imputed as part of the employee’s payroll.In addition to withholding the employee’s share of the FICA, you, as an employer, are responsible for paying a matching amount. The FICA tax is divided between social security and Medicare. The social security tax rate is 6.2%, and the Medicare tax rate is 1.45%. These rates apply to both the employee and employer for a total tax rate of 15.3%.
Example for 2015: You pay your employee $500 a week and do not withhold income tax. You must withhold a total of $38.25 ($500 x 6.2% plus $500 x 1.45%) for your employee’s share of FICA. Thus, your employee’s net paycheck would be $461.75 ($500 - $38.25). In addition, you must match the $38.25 for a total FICA tax of $76.50.
While unlikely that the annual compensation of any one of your household employees would exceed $200,000, you should be aware that in the event that it does, the employee’s share of the Medicare tax rate increases to 2.35% of the income over $200,000 for that year. The employer’s Medicare tax rate is not increased.
As an employer, you are also required to pay FUTA (federal unemployment) taxes if a total of $1,000 or more in cash wages (excluding the value of food and lodging) is paid to your employees in any calendar quarter of the year. This tax (maximum rate is 6.2%) applies to the first $7,000 of wages paid.
As a household employer, you generally are not required to file any of the usual employment tax returns that a business must file. Instead, obtain an employer identification number (EIN) from the IRS and include payment with your individual tax return (1040) using a Schedule H. However, if you own a business as a sole proprietor in which you have employees, you may include the taxes for your household worker(s) on the FICA and FUTA forms (Forms 940 and 941) that are filed for your business. In that case, the EIN from your sole proprietorship is used to report the taxes for your household employee(s).
You are also required to provide your employee with a Form W-2, if the employee’s wages are subject to FICA or income tax withholding, and file the W-2 with the Social Security Administration. It is also your responsibility to file the appropriate employment-related forms for your state of residence. And while not a tax matter, those individuals hiring a household worker must verify that the employee can legally work in the U.S., and then complete and retain the U.S. Citizenship and Immigration Services’ Form I-9.
Generally, a deduction is not allowed on your income tax return for the household employment taxes paid. However, if the wages paid to a household worker are for qualifying medical care of yourself, your spouse or dependents, or if the payments are eligible for the credit for child and dependent care expenses, you may include your portion of the employment taxes (in addition to the wages) when figuring the medical deduction or child/dependent care credit.
The reporting requirements for the “Nanny Tax” can be complicated. Please contact us if you need assistance or have questions.
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