Household Employees – Employment Taxes
The topic of Household Employees is one of the common areas of examination by the IRS Revenue Agents. Therefore, because it is often raised as an adjustment in IRS tax audits, you need to be aware of the rules pertaining to the employment of household employees and your responsibility for withholding taxes – and paying them to the IRS.
Household Employees, also called Domestic Employees, include housekeepers, maids, babysitters, gardeners and others who work in or around your private residence as your employees. This classification also includes caregivers who provide assistance to individuals, usually in the taxpayer’s home. This situation is fairly common with single elderly individuals who cannot care fully for themselves.
Repairmen, plumbers, contractors, registered nurses (RN) and other licensed business people who work for you as independent contractors are generally not considered your employees. Household workers are your employees if you control not only the work they do, but how they do it. You would not normally tell a plumber or nurse how to do their job. See the difference?
If you pay any individual household employee cash wages of $1,700 or more in calendar year 2009 ($1,600 in 2008) to an individual 17 years old or older in a private household, you generally must withhold social security and Medicare taxes from all cash wages you pay to that employee. The dollar threshold applies separately to each domestic employee. Unless you prefer to pay your employee’s share of social security and Medicare taxes from your own funds, you should withhold 7.65% (6.2% for social security tax and 1.45% for Medicare tax) from each payment of cash wages. Instead of paying this amount to your employee, pay it to the IRS – along with an equal matching amount for your share of the taxes.
However, you do NOT have to withhold these taxes from wages you pay to:
- your spouse,
- your child who is under age 21,
- your parent, unless an exception is met; or
- an employee who is under age 18 at any time during the year unless performing household work is the employee’s principal occupation. If the employee is a student, providing household work is not considered to be his or her principal occupation.
As a word of caution, if you decide to pay your employee’s share of their FICA and Medicare taxes, then you must “gross up” their wages for income tax purposes, but not for Social Security Wages. For example, if you paid your employee’s share of his or her taxes in the amount of $500, you must add that amount to the total cash wages you paid your employee when preparing the employee’s W-2 form.
You are not required to withhold Federal income tax from wages you pay a household employee. However, if your employee asks you to withhold Federal income tax and you agree, you will need to have your employee fill out Form W-4 (Employee’s Withholding Allowance Certificate), and obtain a copy of Circular E, Employer’s Tax Guide, which has tax withholding tables.
If you withhold (or pay) social security and Medicare taxes, or withhold Federal income tax, you will need prepare a Form W-2 after the end of the year. You give a copy to your employee by January 31st, and send a copy to the IRS along with a Form W-3. For you to be able to properly complete Form W–2, you will need both an employer identification number and your employee’s social security number. You MUST obtain an Employer Identification Number (EIN) from the IRS for reporting these wages. You can apply for the EIN online at the IRS.GOV website.
If you must file Form W–2 or pay Federal unemployment tax, you will also need to file Schedule H, Household Employment Taxes, after the end of the year with your individual income tax return, Form 1040. However, a sole proprietor who must file Form 940 and Form 941, or Form 943, for their business employees, may include household employee tax information on these forms.
You can avoid owing tax with your return if you pay enough Federal income tax before you file, to cover both the employment taxes for your household employee and your income tax. If you are employed, you can ask your employer to withhold more Federal income tax from your wages during the year. You can also make estimated tax payments to the IRS during the year, or increase the payments you already make. Use Form 1040ES to make estimated tax payments.
You may have to pay an estimated tax penalty if you do not prepay your household employment taxes during the year. Refer to Tax Topic 355 Tax Topic 306 . There is an exception to this penalty, however, if the only reason you owe tax is because of the domestic employee (in other words, you have no tax due on your wages, investments, etc.).
There are a couple of important points to consider when hiring household employees:
You will want to ensure that you have the appropriate insurance riders on your homeowner’s policy to provide worker’s compensation and liability coverage for household employees.
If you pay your employee in cash, be sure you get them to sign and date a receipt that confirms the amount and date they received payment as well as the period covered by the payment ( the hours and dates worked). If you terminate the employee at some future date, they may try to put in a claim for unemployment. That can result in an inquiry as to the payments you made – and taxes you withheld (or should have withheld!).
There are several good web resources that provide assistance in meeting your obligation for paying payroll taxes. The Employee Development Department (EDD) in California has an online website for reporting your State taxes for household workers.
Here are the links:
This site will compute your payroll tax withholding, estimate employer tax amounts and permit you to print a pay stub for your employee(s).
This is another tax compliance service. It includes preparation of the quarterly and year-end returns.
This site is affiliated with Home/Work Solutions, Inc. This site provides information that will be of value to anyone employing household workers.
For more information on this topic, please refer to Publication 926, Household Employer’s Tax Guide, at the IRS website (www.irs.gov).
Additional information is available in the instructions for Schedule H from the IRS. Read that document here: