Household-Employee
Taxes:
Don’t be a Nanny-Tax Ninny
Finding the right person to
care for your home or dependents can be difficult. Fulfilling your tax
obligations for household workers shouldn’t be. To help you comply, the
following summarizes the tax rules covering household employees.
Who is a Household Employee?
If you pay someone to perform
household services in or around your home and that person qualifies as your
employee, you may face several tax responsibilities on the person’s behalf
when the worker’s wages exceed certain amounts. While household employment
taxes are sometimes referred to colloquially as the “nanny tax,” in reality,
the rules extend to babysitters, housekeepers, home health aides, gardeners, and
other similar domestic workers. A household worker is considered your employee
if you control not only what work is done, but also how it is done. If an agency
supplies the worker and exercises control over what work is done and how it is
done, that worker is not your employee. Similarly, if the worker controls these
factors, and uses his own tools and supplies, he or she is likely to be
categorized as self-employed.
What Taxes am I Responsible for?
As a household employer, you
generally are responsible for paying two taxes: FICA (Social Security and
Medicare) and FUTA (Federal Unemployment) taxes. Social Security and Medicare
taxes pay for benefits that workers and their families receive under the Federal
Insurance Contribution Act (FICA).
Federal law requires you to
withhold and pay FICA taxes if you pay an employee more than $1,100 during the
calendar year. (When your payments equal or exceed the $1,100 threshold, the
entire amount of wages paid and not just the excess is subject to FICA taxes.)
If your worker is under age 18 at any time during the year, and the domestic
service provided is not his or her principal occupation, you do not have to
withhold FICA taxes.
For 1999, you and your
employee each pay FICA tax at a rate of 7.65 percent. You either can withhold
your employee’s share from his or her wages or pay it from your own funds. If
you pay the full amount, the employee’s share must be included in the
employee’s wages for income-tax purposes.
If you pay cash wages of
$1,000 or more to all household employees in any calendar quarter, you are
liable for FUTA taxes.
The FUTA tax rate for 1999 is
6.2 percent of the first $7,000 of wages you pay to each employee during the
calendar year. However, an employer is allowed a partial credit against his or
her taxes based on state unemployment insurance tax liability. FUTA taxes are
your responsibility and must be paid from your own funds. You cannot withhold
FUTA taxes from your employee’s wages.
As a household employer, you
are not required to withhold federal income taxes from your worker’s wages.
However, you may do so if your worker requests that of you and you agree. Just
be sure you have the worker provide you with a completed Form W-4, Employee Withholding Allowance, so you can withhold the correct
amount.
What are My Reporting Responsibilities?
Generally, you use Schedule H
(Form 1040) of your individual tax return to report FICA taxes, as well as
federal unemployment taxes and any federal income taxes withheld from the
worker. However, if you own a business as a sole proprietor, you can include the
taxes for your household worker on the FICA and FUTA forms that you file for
your business.
How can I Avoid Penalties?
Beginning in 1998, household
employers must make quarterly payments of Federal Household Employment Taxes
(Social Security, Medicare, FUTA, and withheld Federal Income Taxes) or risk
substantial penalties. (The penalty-free year-end payment option is no longer
available.) There are several ways you can meet your obligation of paying enough
employment taxes for your household help, as well as sufficient income tax for
yourself. You can request that your employer withhold more federal income tax
from your wages. For a pension or annuity, you can request more federal income
tax withholding from your benefits. Or, you can begin to make or increase your
estimated tax payments.
If you do not have enough federal income tax
withheld or pay enough estimated tax, you may have to pay an estimated tax
penalty. IRS Publication 505, Tax
Withholding and Estimated Tax can help you determine the correct amount of
withholding so you can avoid penalties.