Employment Taxes for Household Employees

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	Household Employees and Taxes Personal Finance Advisor by Deloitte & Touche OnLine October 4, 1999

For workers in your house, what taxes are you responsible for?

Although the scandals of past years involving the "nanny tax" have begun to fade from public memory, these tax obligations remain a part of the law. If you have a maid, gardener, nanny, babysitter, or other household worker who qualifies as your employee, and wages paid to this employee exceed certain limits, you may be responsible for collecting and paying certain federal taxes, including Social Security, Medicare, and unemployment taxes.

Definition of Employee: The IRS has developed a list of factors to determine whether an employer-employee relationship exists. In general, a household worker is considered an employee if his/her work is controlled by the employer. A worker is not an employee if he/she controls the work by, for instance, providing the necessary tools and offering services to the general public.

Social Security and Medicare Taxes: If an individual employer (for example, you) pays a household employee more than $1,100 in cash wages in 1999, Social Security and Medicare taxes (FICA) will be assessed at the rate of 15.3 percent. Half of this amount (7.65 percent) is due from the employer and the other half is due from the employee -- the employer is responsible for submitting the full 15.3 percent. The employee’s share may be withheld from his/her pay or the employer may decide to pay both the employer and employee share.

If the employer pays the employee share of FICA tax, this amount will be treated as additional wages for income tax purposes, but is not subject to additional employment tax. As a general rule, withholding of FICA does not apply to wages paid to your spouse, parents, child under age 21, or an employee who is under age 18 at any time during the year. The Social Security portion of the FICA tax (12.4 percent) is assessed on wages up to $72,600 in 1999, while the Medicare portion (2.9 percent) is assessed on all wages. If the employer expects the employee’s wages will exceed $1,100 in the year, the employer should start withholdings as of the first paycheck (if the employee ceases working before earning $1,100, the withholdings can be returned to the employee).

Unemployment Taxes: If an individual employer pays cash wages to a household employee totaling $1,000 or more in any calendar quarter of 1999, the first $7,000 of wages paid to the employee is subject to 6.2 percent federal unemployment tax (FUTA). Employers also may be subject to state employment taxes. If the employer pays the correct amount of state unemployment tax in a timely manner, a credit of up to 5.4 percent may be available (that is, net FUTA of 0.8 percent). FUTA is not withheld from the employee’s wages, but is paid by the employer. Certain exceptions apply to the FUTA -- the tax generally does not apply to wages paid to your spouse, parent, or child under age 21.

Federal Income Tax: If a household employee requests his/her employer to withhold federal income tax and the employer agrees to do so, the employee must complete IRS Form W-4, Employee’s Withholding Allowance Certificate. The employer is then responsible for payment of withheld amounts to the IRS. Use income tax withholding tables in IRS Publication 15, Circular E, Employer’s Tax Guide, to determine the proper amount to withhold. This amount is based on both cash and noncash items; therefore, the employer will need to measure the value of noncash wages (for example, the use of an automobile).

Employers also will need to complete Form W-2, Wage and Tax Statement, to report employee wages and withholding for the preceding year. Household employees must receive Form W-2 by January 31 of the year following the year of payment, and the employer is required to mail a copy of the form to the Social Security Administration by February 28.

If an individual employer agrees to withhold income tax, he/she must notify the employee about the advanced payment of the earned income tax credit (EIC). If eligible for the EIC, the employee will need to complete Form W-5, Earned Income Credit Advance Payment Certificate. The employer then pays the amount determined under the EIC payment tables to the employee and reduces the amount submitted to the IRS for FICA and income taxes withheld.

Making Payments: An employer of a household employee is not required to file federal quarterly employment tax returns. Generally, if an individual employer withholds or pays Social Security, Medicare, FUTA, or income taxes because of a household employee, the employer attaches Schedule H (Form 1040), Household Employment Taxes, to his/her federal income tax return and adds the household employment taxes to his/her individual income tax liability. Therefore, the individual employer’s personal withholdings and/or estimated tax payments need to be sufficient to cover the employment tax owed from Schedule H. To file Schedule H, an individual must have an employer identification number (EIN) -- the EIN is not the same as the Social Security number. To request an EIN, use Form SS-4, Application for Employer Identification Number.

Employment Eligibility: When hiring a household employee, verify that the individual is either a U.S. citizen or an alien who can legally work in the United States by having the potential employee complete Immigration and Naturalization (INS) Form I-9, Employment Eligibility Verification.

These are some thoughts to consider about employment taxes for household employees. Your Deloitte & Touche financial advisor also can provide information and should be consulted before any action is taken.