What Are the Tax Implications of Hiring Household Help?

There’s no doubt that hiring someone to regularly clean your home, care for your children or an aging parent, or maintain your yard has the potential to help your life run more smoothly.  There are many unexpected or hidden issues when you hire household help. You need to stay on top of the relevant legal, tax and reporting responsibilities. Here are some highlights of the tax-related obligations associated with household help.

If you plan to pay a nanny, cleaning person, cook, gardener or other household worker at least $2,000 in 2017, which includes any cash you pay for your employee’s transportation, meals, and housing – you have certain tax responsibilities.

When you pay at least $2,000 in wages to a household worker:

  • You have to pay Social Security, Medicare, and federal unemployment insurance.
  • You may withhold, at the employee’s request, state and federal income tax.
  • Depending on your state regulations, you may have to withhold state income tax and pay disability and workers’ compensation insurance.
  • You are required to file certain paperwork with the appropriate government agencies and retain other documentation for review upon notice.

You are responsible for the above, regardless if you pay in cash, if your employee lives outside the home, whether the work is full time or part time, or that you hired the worker through an agency or from a list provided by an agency or association. It also does not matter whether you pay the worker by time period (hourly, daily, weekly, etc.) or on a by-the-job basis.

Independent Contractor or Household Employee?

The IRS defines a household employee as someone hired to do work in or around a home, at the direction and control of the person who lives in the home. Household employees include housekeepers, maids, babysitters, gardeners, and others who work in or around your private residence. Repairmen, plumbers, contractors, and other business people who provide their services as independent contractors, are not your employees. Household workers are your employees if you can control not only the work they do, but also how they do it. Independent contractors, on the other hand, determine for themselves how the work is to be done.

Here’s an example provided by the Internal Revenue Service. “You made an agreement with John Peters to care for your lawn. John runs a lawn-care business and offers his services to the general public. He provides his own tools and supplies, and he hires and pays any helpers he needs. Neither John nor his helpers are your household employees.”

Employment Taxes

In general, if you pay a household worker at least $2,000 in 2017, you must also pay Social Security taxes of 6.2% on cash wages of up to $127,200 (in 2017), as well as a Medicare tax of 1.45% on all cash wages. “Cash wages” refers to compensation paid by check or money order — but doesn’t include the value of food, lodging or other noncash compensation.

You’re also responsible for submitting the employee’s share of Social Security (also 6.2%) and Medicare (also 1.45%) taxes. If you cover the employee’s share yourself (adding up to 7.65%), you’ll need to include that amount as wages for income tax purposes, but not for reporting Social Security and Medicare.

If you pay an employee $1,000 in any calendar quarter, you may also owe federal unemployment (“FUTA”) tax. This is 6% of the employee’s cash wages — up to $7,000 each year — though this amount may be offset by a credit.

Federal income tax withholding is optional on the part of the employer. You do not have to withhold income tax on wages paid to household employees unless the employee requests it and you agree to it. Form W-4, “Employee’s Withholding Allowance Certificate,” should be completed by the employee, if you agree to withhold the tax. This will help you determine how much income tax to withhold.

States generally follow federal rules regarding domestic employees. There are exceptions, so refer to your state’s laws.

  • State Income Tax. This tax is withheld if the employee requests withholding and the employer agrees. See your state regulations for details.
  • State Unemployment Insurance (“SUI”). Some states follow the federal rules for unemployment insurance reporting for domestic employees; however, some set their own. Check with your state for SUI reporting requirements.
  • State Disability Insurance. In some states, individuals who hire domestic employees are required to contribute to a state disability insurance fund.
  • Workers’ Compensation. This insurance provides benefits to workers who become disabled due to a work-related accident or illness. Check your state laws regarding workers’ compensation insurance. Some homeowners’ policies may already provide disability coverage for domestic workers.

Employer Identification Number and Registration

Employers must complete the following requirements:

  • Obtain an employer identification number (“EIN”). This number is not the same as your social security number. Federal Form SS-4, “Application for Employer Identification Number,” registers you with the IRS. The form is available at the IRS or Social Security Administration Offices, or online at www.irs.gov.
  • Check with your state for the specific state application form.
  • Verify your employees’ citizenship. To hire or continue to employ an undocumented immigrant who cannot legally work in the United States is against the law. You must fill out and retain U.S. Citizenship and Immigration Services (“USCIS”) Form I-9, “Employment Eligibility Verification Form”. The employee must complete the employee section of the form no later than the first day of employment, by providing certain required information and attesting to his or her current work eligibility status in the United States. You must complete the employer section by examining documents presented by the employee as evidence of his or her identity and employment eligibility. You should keep the completed Form I-9 in your own records. The form should be available for review upon notice by an authorized U.S. government official.

Recordkeeping

You’ll need to record the names, addresses, Social Security numbers, and cash and noncash wages paid to household employees, as well as taxes withheld or paid, and retain this information for at least four years after the due date of the tax return on which the taxes were reported. In addition, you’ll need to obtain an Employer Identification Number, or EIN.

You need to provide your employees with copies B, C and copy 2 of IRS Form W-2 (“Wage and Tax Statement”) by January 31 of each year. You must send copy A of the W-2 to the Social Security Administration.

You must complete and include Schedule H, “Household Employment Taxes” with your federal income tax return. The calculated amount of Social Security, Medicare and FUTA will be added to your income tax liability for the year.

To avoid having to pay household employee taxes when you file your return, you can make estimated payments throughout the year. Or, if you’re employed, you can ask your employer to increase the amount of federal income tax withheld.

Exceptions

These tax and reporting obligations don’t apply in the following situations, even if the employee’s annual wages total more than $2,000:

  • The employee is under age 18 at any time during the year.

Exception: wages are subject to payroll tax if providing household services is the employee’s principal occupation. If the employee is a student, providing household services is not considered to be his or her principal occupation,

  • The employee is your spouse,
  • The employee is your child and under age 21, or
  • The employee is your parent (with some exceptions).

Who Can Help?

Complying with these regulations helps your employee build an employment record and gain access to Social Security, Medicare and other benefits. It also can ensure that legal and financial problems related to hiring household help are kept to a minimum.

Any employer who wants to know more about their household employee tax obligations, determine who is or isn’t considered an employee, and make sure they remain in compliance with the law should consult their tax advisor.

© 2017

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