A household employee is someone who is hired to do household work. The employer, who is usually the head of the household, controls the work to be done and how it is done. Additionally, they provide the tools and instructions necessary to perform the household work.
It does not matter whether the employee is hired through an agency or how frequently the employee is paid. Some common examples of household employees include the following:
- Babysitters and/or nannies;
- Maids and/or housekeepers;
- Private nurses;
A worker who offers services to the general public provides their own tools, and controls how the job is done, such as by hiring their own crew or assistants, is self-employed and not a household employee.
The employers of household workers must also remember to have their workers complete the Department of Homeland Security, U.S. Citizenship and Immigration Services (USCIS) Form I-9 to establish that they are authorized to work legally in the U.S. no later than the first day of work.
The employee must provide their employer with documentation that proves their identity and that they are authorized to work legally in the U.S. Acceptable documents include a U.S. passport, Social Security card, driver’s license, or other state identification.
If a person has a question about whether their household employee is an employee or an independent contractor, a person can fill out and submit Form SS-8 to the Internal Revenue Service (IRS). The form comprises approximately 20 questions regarding the nature of the work the employee does in the household. Once the form is submitted, the IRS reviews it and then provides a person with a ruling as to the status of the employee.
What Is Household Employment Tax?
In 2022, if a person paid their household employee total annual wages of no less than $2,400, then they were required to report and pay federal Social Security, Medicare, and federal unemployment taxes on that employee’s annual wages. The Internal Revenue Service (IRS) raises the annual total payments threshold each tax year to keep pace with inflation. This obligation is a matter of federal tax law.
If a person pays a household employee total wages of $1,000 or more in any calendar quarter, then they must report and pay federal unemployment tax.
Some states may also require you to pay state unemployment tax for a household employee.
Do I Have to Report and Pay Federal Taxes on a Household Employee’s Wages?
A person who pays a household employee $2,400 or more in tax year 2022 has the same tax withholding obligations as any business. The person must ask their employee to fill out an IRS Form W-4. Then, a person must withhold taxes, provide pay stubs, and file an IRS Schedule H with their federal income tax return. There are several other tasks a person must attend to as well.
If a person fails to fulfill their obligation to the IRS, the government is going to learn about the fact that they did not pay the required taxes. This could happen in a number of ways, e.g., the person might set up an account and then not make tax payments. Or their employee might file for unemployment or Social Security benefits.
There is no statute of limitations on failure to pay, so the employer has to pay the taxes eventually. If they have to pay later, then they may end up paying interest on amounts owed and penalties also. They may end up making an offer in compromise to resolve their debt to the IRS.
How Do I Report and Pay Federal Taxes on a Household Employee’s Wages?
A person needs to obtain an employer identification number (EIN) in order to set up their payroll and employment tax accounts so their taxes can be processed correctly. A person can register for an EIN online at the IRS website. A person needs a valid Social Security number or Individual Tax ID Number for this purpose.
A person then needs to set up their payroll and taxes. First, a person must decide how often they plan to pay their employee, e.g., weekly, biweekly, or semimonthly. It can be helpful to use some kind of payroll accounting software. The use of payroll software is not mandatory, but it can be helpful.
A person must set up a direct deposit of the payment to their employee and a process for issuing pay stubs. Again, direct deposit is not required. However, it is arguably easier for the employee. A person would want to check with their employee to make sure they want direct deposit. The employee may prefer receiving a check.
A person must then withhold Social Security and Medicare taxes from their employee’s pay and remit them to the federal government. Both taxes combined total 15.3% of the wages paid to the employee. The employer pays 7.65% of total wages, and the employee pays 7.65%. The Social Security portion is 6.2% for each, and the Medicare portion is 1.45%.
As of 2022, only wages paid up to an annual total of $147,000 are subject to the Social Security tax. This cap increases to an annual total of $160,200 for tax year 2023. This cap on the amount of wage payments that are subject to Social Security tax is called the “wage base.”
It applies only to Social Security, not Medicare. A person can stop withholding Social Security for the rest of the year when they have completed paying their employee this amount in wages. Then, of course, they would want to resume Social Security withholding again in January of the next year.
Some employers elect to pay the entire 15.3% themselves and not withhold taxes from the employee.
In addition, an employer must pay a 6% federal unemployment tax (FUTA) on the first $7,000 a year that they pay to their employee as of 2021 and 2022. However, an employer could be eligible for a FUTA tax credit of up to 5.4% if they also pay a state unemployment tax. A person can investigate this possibility by visiting the website of the U.S. Department of Labor for a list of state unemployment tax agencies.
An employer must provide their employee with an IRS Form W-2 at the end of the calendar or within the first month of the next year. The W-2 should report the total amount of wages that were paid to the employee in the tax year as well as the total amount withheld for the various taxes.
An employer wants to file an IRS Schedule H with their own Form 1040 to summarize the annual payroll taxes. The employer can also choose to pay quarterly estimated household employment taxes using Form 1040-ES.
The legal process of hiring a household employee can become complicated. Consulting a tax attorney who can help a person set up processes and prepare tax filings is advisable.
Do I Need the Help of a Lawyer for My Tax Withholding Issue?
As can be seen, tax law can become complicated, and compliance can be frustrating. To make matters worse, tax law frequently changes. LegalMatch.com can quickly connect you to a tax attorney who can help you understand current tax law and how it affects your tax problem.
Your tax attorney can help you set up a withholding system that works for you.
If you have not paid taxes for several years, a lawyer can assist you by negotiating with the IRS for an offer in compromise or installment payment agreement. If you need to go to tax court, an attorney can represent you and help minimize your income tax bill.