Individuals who employ domestic employees like nannies, cleaning services, gardeners, and housekeepers are considered to be employers. Specifically, they're "household employers," according to the IRS, and they must comply with all the usual tax regulations concerning employees.
FICA taxes are Social Security and Medicare taxes. They're deducted from the pay of employees and they're also paid by employers—each pays one half. They apply to domestic employees if you pay the worker more than $2,100 annually as of 2019. This limit can change each year.
The FICA tax is a total of 15.3%—12.4% for Social Security and an additional 2.9% for Medicare. This works out to 7.65% of wages paid for the employer and the employee each. You must withhold the required amount from each paycheck and put aside an equivalent amount from your own funds.
You must also withhold an Additional Medicare Tax amount from any single household employee to whom you pay $200,000 or more a year as of 2019. This increases to $250,000 for employees who are married and who file jointly, and it drops to $125,000 if they're married but file separately.
The tax is per worker, so if you pay several workers more than the annual minimum each, the tax must be paid for each of them.
Only wages up to a "wage base" of $132,900 are subject to the Social Security portion of the tax as of 2019. Make sure your employee lets you know if they reach this level of earnings during the year because they hold down other jobs. You can stop this withholding at this point for the balance of the year.
There are some cases when you don't have to pay employment taxes for household workers. Employees are exempt if they actually work for an agency, not for you. In other words, you pay the agency and pass on responsibility for employment taxes to that entity.
Employees are exempt if they provide care in their own home, not yours, such as a babysitter. Your spouse and parents are exempt, although some exceptions apply to parents. Minors younger than age 18 are exempt, and special rules apply to paying your own children.
Income Tax Withholding
You don't have to withhold income taxes from the pay of household workers, but you can do so if the worker requests it. Have the employee complete a W-4 form, supplying you with the information you'll need to calculate the correct amount to withhold.
This tax is paid by you, not by your employee. As of 2019, it works out to 6% of wages paid up to $7,000 for the calendar year if you pay that worker at least $1,000. You can stop paying this tax when wages paid hit that $7,000 benchmark.
Wages paid to your child under age 21, your spouse, and your parent are exempt, and you might be able to claim a tax credit for up to 5.4%.
Reporting and Payment Requirements
You must remit any withholding amounts for FICA taxes and income taxes to the IRS periodically, and report the amounts owed and paid quarterly on IRS Form 941.
New Hire Paperwork
You must also complete some new hire paperwork, and this involves a variety of tasks.
Get a federal employer identification number (EIN) from the IRS. It's like a Social Security number, but it's for employers.
Have the employee complete Form W-4 so you can calculate federal tax withholding.
Verify your employee's eligibility to work in the U.S. by having them complete Form I-9. It's against the law to knowingly hire or employ an illegal alien.
Register with your state as an employer.
You should also determine if your employee is eligible for the earned income tax credit (EIC) for low-income individuals. You're obligated to provide a notice about this credit if you agree to withhold income taxes from their wages and if they fall below the withholding thresholds according to the federal income tax withholding tables for the year.
You must provide an EIC notice to workers who earn less than $49,194 as of 2018, or $54,884 if they're married and filing jointly. These thresholds are indexed for inflation, so check them annually.
How to File End-of-Year Tax Reports
You must file a Schedule H, the Household Employment Taxes form, with your personal tax return if you pay a domestic worker more than $2,100. This form records information regarding how much you paid, the income taxes you withheld, and the FICA taxes you withheld and paid during the year.
If You Hire an Independent Contractor
The rules are entirely different if you hire an independent contractor to work for you at home. You do not have to pay a share of FICA taxes or worry about withholding from their pay—these workers are responsible for paying their own taxes.
The IRS indicates that you've probably hired an independent contractor if the individual determines when and how their work for you is completed. The contractor typically does work for several other families in addition to your own.
Joe's Lawn Care does your landscaping on a day and at a time that Joe has determined. He squeezes you in between other customers, and he provides his own mowers and other equipment for the job. Joe is an independent contractor.
Differentiating between employees and contractors is sometimes a difficult task, so you might want to consult with an employment attorney or ask the IRS to make a determination by submitting Form SS-8. The IRS assumes that a worker is an employee unless you can prove otherwise, and the IRS audits employers to make sure that workers are properly classified.
Have the worker sign IRS Form W-9 to verify their tax ID number. You must deduct backup withholding from each payment you make to this individual if you don't have a tax ID or Social Security number, or if the number isn't correct.
Give the contractor IRS Form 1099-MISC at the end of each year in which you pay them $600 or more, rather than a W-2. Submit the 1099-MISC to the IRS along with Form 1096. The 1096 covers multiple 1099s. You don't have to send one for each and every 1099 you issue if you pay more than one contractor.
You have until Feb. 29 to mail this paperwork, or until March 31 if you file electronically.
You Might Get Some Money Back
You might qualify for a tax credit equal to a portion of the cost of caring for your child while you and your spouse work or look for work if this is why you're paying household help. It's actually a tax credit for both child care and dependent care, such as if you're supporting and responsible for an aging parent.
The Child and Dependent Care Credit is equal to a percentage of what you pay up to $3,000 for one child or dependent, or $6,000 for two or more. Your child must be under age 13 or incapable of self-care, and your dependent must be incapable of self-care. You must have earned income to qualify.
The credit ranges from 20% to 35% of your expenses, depending on your income. The more you earn, the less of a percentage you can claim.
It might not be a lot, but every little bit helps at tax time.
NOTE: This article is intended as a general introduction to this topic and is not tax or legal advice. Check with your tax professional before you hire household workers. Each situation is different, and tax laws change periodically.