August 05, 2020
Having help around the house can be an enormous benefit for families that are overwhelmed with work, parenting, and other obligations. Hiring a household employee, however, can affect your taxes, so it is important to know what you are getting yourself into.
What Is a “Household Employee”?
The IRS uses a two-part definition of “household employee”: the job must involve domestic services, and the person must be an employee rather than an independent contractor.
The term “domestic services” includes any work typically done in or around the home, including:
– House cleaning;
– Child care;
– Gardening or groundskeeping; and
– In-home nursing care.
One might be tempted to think of a large, exceedingly-wealthy household like the one depicted in the television show Downton Abbey. Many households in the U.S. employ one or two household employees, such as a housekeeper and a nanny.
Employee or Independent Contractor?
The key distinction between an employee and an independent contractor is the extent to which the employer controls when and how a person does their job. If a housekeeper works on a schedule set by the employer, using cleaning products and equipment that the owner provides, they are probably an employee. If the housekeeper comes to the employer’s home on a schedule that they can change, using their own supplies, they are more likely to be an independent contractor.
What Are My Tax Liabilities if I Have a Household Employee?
If you employ someone as a household employee and pay them more than $2,100 in the calendar year, you are responsible for some of the taxes that other employers must pay for their workers.
Federal Income Tax
Employers of household employees are not required to withhold estimated federal income taxes from employee paychecks. They can do so if the employee requests it.
Employers of household employees are responsible for payroll taxes, which go towards the Social Security and Medicare programs. They must pay half of the tax, and withhold the employee’s share from their wages.
The employer and employee must each pay 6.2 percent of wages for Social Security and 1.45 percent for Medicare. Suppose a household employee is paid $750 per paycheck. The employer would be responsible for withholding $46.50 (6.2 percent) for Social Security and $10.88 (1.45 percent) for Medicare. The employer would owe an equal amount.
Employers must also pay federal unemployment tax on the first $7,000 in wages. This is usually six percent of the employee’s gross wages.
What IRS Forms Should I File?
The IRS has stated that all newly-hired household employees should complete the redesigned Form W-4, even if they are not requesting withholding. The employer keeps this form in their records.
You should file Form W-2 with the IRS to report the amount of wages paid and taxes withheld, if any. Form W-3 provides similar information to the Social Security Information. You can report employment taxes withheld and paid on Schedule H, which attaches to your tax return.
Are There Tax Benefits to Having a Household Employee?
The child and dependent care credit is available to families that paid for childcare for a child who is under the age of thirteen, or any age if the child has a disability. A credit of up to $3,000 is available for one child, or $6,000 for two or more children.
If you have questions about a tax-related matter, please contact the Enterprise Consultants Group today online or at (800) 575-9284. Our tax advisors are available to address your concerns and discuss your rights and options.