You might have heard the term “Nanny tax” or even remember “Nannygate” if you are old enough. In 1993, two nominees by the President for the U.S. Attorney General were torpedoed by hiring illegal workers and issues with payroll taxes. Employees and payroll taxes may seem trivial and mundane, but an ostensibly minor violation could have major implications.
If you want to hire someone to take care of your babies or elderly parents at home, what do you need to do to be in compliance with payroll tax laws?
First you should understand if you have a household employee or not. The main consideration is “Control.” Do you control the schedule, methods, and tools in which the worker performs tasks for you? For example, if you hire a person to take care of your lawn and he offers similar services to the public, uses his own tools, and hires and pays any additional help he needs, this person is not your employee but an independent contractor. On the other hand, if you hire a person to take care of your landscape and you determine a schedule and provide tools and methods, the person is a household employee. Just as if you hired a butler, a nanny, a nurse, a driver, or a cook that works at your home under your control. Another interesting distinction is that services NOT of a household nature, such as services performed as a private secretary, tutor, or librarian, even though performed in your home, aren’t considered household work.
Generally speaking, when you hire a household employee, you need to follow the same labor and employment laws and pay the same payroll taxes with the same tax rates. However, the tax withholding, deposits, and payroll reporting processes can be easier than that for a typical company. The following table is a very general comparison of household employee payroll tax requirements for a typical company and an employer of household employees.
|Withholding taxes||Company||Household employer|
|Federal income tax||Required||Not required, though the employee can ask you to withhold|
|Social Security Tax||Required||same %, though employer can pay for the household employee|
|Medicare Tax||Required||same %, though employer can pay for the household employee|
|FUTA (Fed Unemployment)||Required||same %, though employer can pay for the household employee|
|Pay taxes to the IRS|
|When to pay (deposit schedule)||Pay payroll taxes monthly or semi-weekly, etc.||When you file your own 1040 form|
|How to pay||Pay at www.EFTPS.gov, etc.||Pay with your own tax obligations|
|File Payroll reports|
|Quarterly Form 941||Required||Not required|
|Annual Form 940||Required||Not required|
|W-2 form||Required||Provide a W-2 to employee, file W2 to SSA|
|Schedule H (with 1040 Form)||Not applicable||Prepare and file with your own 1040 form, including taxes|
For household employees, you (the employer) can withhold payroll taxes then issue a W-2 at the end of the year, prepare and file a Schedule H with your own tax return (Form 1040), and pay all payroll taxes then. At Paycheck Manager, there are numerous tools to assist with your payroll taxes including a paycheck calculator and online payroll services.
In addition, there are several issues you need to consider, including, but not limited to:
- You need to make sure you pay enough personal taxes (including the payroll taxes for the household employees) during the tax year. If you owe too much when you file your 1040 form, you will be penalized. You can ask your own employer (if you work) to withhold more from your paychecks or pay estimated taxes during the year. You can use our paycheck calculator to assist.
- You should apply for a Federal Employer Identification Number (EIN) for preparing and filing W-2 forms. If you paid more than $2,100 to the household employee for the year, you will need to withhold and pay FICA taxes.
- You can choose to file form 941, 940, W-2 and pay payroll taxes regularly, just like a normal employer. An EIN will be required for filing these forms.
- Typically, you do not withhold or pay Social Security, Medicare taxes, and FUTA for your family members (spouse and children).
- If you provide additional benefits to the household employees, like housing, car, clothing, etc., the benefits are not taxed for Social Security, Medicare taxes, and FUTA, but they are included for Federal income tax calculations.
- Regular payroll tax rules apply to the household employees (additional Medicare tax for annual payment over $200,000 or Social Security wage limit, etc.).
In summary, if you hire a household employee, you should think like an employer. You need to consider business payroll tax withholding, tax deposits, and payroll tax returns. The same payroll tax tables and laws apply, but the tax payment and reporting can be simpler. Check the IRS tax guide for Household Employers. Depending on where you live, the same State requirements for employers (withholding, tax deposits, and reporting) will likely apply to a Household Employer. You may also need to apply for a State tax account ID and pay taxes and file reports accordingly.
If you use an online payroll service such as Paycheck Manager, you can calculate paychecks, create and prepare as normal, and have the online payroll service prepare and manage the tax deposits and payroll reporting. You can pay the taxes and file a Schedule H with your personal income tax return at the end of the year. However, it is critical to know that you paid sufficient payroll taxes during the tax year. Do not wait until you prepare your 1040 to find out that you owe a large amount of payroll taxes, in addition to your personal income taxes. You will be penalized.