Hiring and Paying a Household Employee
Individuals who employ domestic services, such as nannies, cleaning services, gardeners, housekeepers, and other workers are considered employers (specifically "household employers," according to the IRS) and they must comply with all the regulations concerning employees. Household workers may perform household work in a private home, local college club, or local fraternity or sorority chapter.
This article will review the basics of taxes you need to be aware of and pay if become an employer of a household worker, pay domestic employees, and comply with federal and state employment laws and regulations.
Determine if you owe FICA taxes for this domestic worker.
FICA taxes are Social Security tax and Medicare tax, deducted from the pay of employees and also paid by employers. FICA taxes also apply to domestic workers, if you pay a worker more than $2100 annually (for 2018). This limit is changed each year.
FICA taxes are paid half by employers and half by employees for Social Security and Medicare. The tax is 15.35 percent (7.65 percent for each the employer and employee). You must withhold the required amount from each employee paycheck and put aside an equivalent amount from your own funds. You must also withhold an additional Medicare tax amount from any household employee whom you pay $200,000 or more in a year.
The tax is per worker, so if you pay several workers more than the annual minimum each, the tax must be paid for each worker who is paid more than the minimum.
There are some cases when you don't have to pay employment taxes for household workers:
- If the worker is employed by an agency.
- If the worker provides care in their own home (not yours).
- If the person providing care is your spouse.
- If the person providing care is your parent (although some exceptions apply).
- If the person providing care is your child under age 21.
Employment taxes for household workers.
You don't have to withhold income taxes from the pay of household workers, but you can withhold if the worker requests you do this. Before you begin withholding income taxes, you must have the employee complete a W-4 form with information on how to calculate the withholding amount.
You must pay these any withholding amounts (for FICA taxes and income taxes) to the IRS periodically and report quarterly on IRS Form 941 amounts owed and paid
You must provide each employee an annual report of pay and withholding amounts on Form W-2 and provide the Social Security Administration with copies of all W-2s and transmittal forms (on Form W-3).
Paperwork needed for new domestic employees.
In addition to dealing with FICA taxes, you must also complete new hire paperwork and withhold federal and state income taxes and more. Here are the basics of what you must do:
- Get a federal employer identification number (an EIN) that is your employer registration, like a social security number
- You must have the employee complete new hire paperwork, including Form W-4 for federal tax withholding
- You must also verify your employee's eligibility to work in the U.S., using Form I-9. It is illegal to knowingly hire or continue to employ an illegal alien.
- Check to see if your employee is eligible for the earned income credit for low-income individuals.
- You must also register with your state as an employer.
How to file end-of-year tax reports.
If you pay a domestic worker more than the minimum noted above, you must file a Schedule H - Household Employment Taxes form along with your personal tax return. This form records information on how much you paid domestic workers, income taxes you withheld, and FICA taxes you withheld and paid during the year.
Read more about Schedule H - Household Employment Taxes from William Perez at Tax Planning.
If you hire a domestic independent contractor.
If you hire a cleaning service or other independent contractor to work for you at home, you must:
- Have the independent contractor sign IRS Form W-9 to verify the tax ID number of this individual or company. If you do not have a tax ID number, or if the number is not correct, you must deduct backup withholding from each payment you make.
- Each year you must give the contractor IRS Form 1099-MISC if you have paid the contractor $600 or more the previous year, and you must submit the 1099-MISC to the Social Security Administration.
If you are not sure if the worker is an employee or an independent contractor, read more about how to distinguish between employees and independent contractors. This is sometimes a difficult task, so you may want to consult an employment attorney. You can also ask the IRS for a determination, by using Form SS-8. The IRS assumes that a worker is an employee unless you can prove otherwise, and the IRS audits employers to be sure that workers are properly classified.
To learn more about becoming an employer and your responsibilities for payroll and payroll taxes, this article on Payroll and Payroll Taxes Step by Step should be helpful.
For more information, see Publication 926 - Household Employer's Tax Guide.
The child care tax credit.
You may qualify for a tax credit for the cost of caring for your child while you work. This cost can include payments to a nanny or other childcare person. It's actually a tax credit for both child care and dependent care (like an aging parent).
This article and all information on this site is not intended to be tax or legal advice but is intended to be general information only. Each situation is different and tax laws change. Check with your tax and legal advisors before taking any actions on issues like this one.
This article is intended to be a general introduction to this topic and is not intended to be tax or legal advice. Before you hire household workers, check with your tax professional.