Have a Household Employee? Be Sure to Follow the Tax Rules

If you have hired someone to perform work around your home, it pays to be aware of the tax rules that apply to household employees, because there is a fair chance they apply to you. Failure to properly report and pay taxes relating to a household employee can cost you monetary penalties, interest, or in some cases, even more. This issue periodically receives a sizeable amount of press coverage, as was the case recently, when it was revealed that the current White House Budget Director reportedly failed to properly pay employment taxes on one of his household employees.

In simple terms, if you pay wages in excess of $2,000 per year to any single household employee, or more than $1,000 to all household employees combined in any calendar quarter, you may be responsible for paying federal Social Security, Medicare, and unemployment taxes.

We have written this blog post to help you understand when you may be subject to the household employee tax rules and to offer a general outline of what is required to comply with those rules. It is strongly advised that you work with a qualified tax professional to determine whether these rules apply to your particular situation and for assistance with properly complying with the rules, if they do. If you’d like to research this matter further, IRS Publication 926 provides an excellent synopsis of the rules related to household employees and how to go about complying with them.

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WHO IS A HOUSEHOLD EMPLOYEE?

For purposes of the tax rules, household employees are people whom you both: (1) hire to perform household-related services; and (2) exert a level of control over sufficient to create an employer-employee relationship. Household-related services include babysitting, housekeeping services, nannies, lawn-care providers, private nurses and more. In general, an amount of control sufficient to qualify you as an employer includes control over both: (1) what work is done; and (2) how it is done. Whether or not a particular household worker you’ve hired is deemed to be your household employee depends on the specific facts and circumstances of each particular situation.

One common litmus test for determining whether an individual would be deemed to have sufficient control over a household worker is whether or not the household worker provides his/her own supplies and tools. One example of this principle, used by the IRS in Publication 926, is that of a lawn care provider. According to the IRS, if a homeowner hires a lawn care provider to maintain his lawn, and that provider brings his own equipment and hires and pays any helpers he needs, the lawn care provider and his helpers are considered to have control over how the work is to be performed. Therefore, neither the worker, nor his employees, are considered household employees of the homeowner.

If a person who performs work around your home is not deemed to be your employee, he/she would either be an employee of a business you’ve hired to perform the work or would be deemed to be self-employed.

WHAT ARE HOUSEHOLD EMPLOYMENT TAXES?

There are a variety of taxes that may apply to the employer, to the employee or to both of them in any given tax year, depending on the specific situation. These taxes include:

• Social Security Taxes. A 12.4 percent Social Security tax applies to the first $127,200 (for tax year 2017) of the earnings of most workers (but not to wages beyond that amount). Employees pay half of this tax (6.2 percent) and their employers pay the other 6.2 percent. Employers are typically responsible for collecting and paying both their own, and their employee’s share.
• Medicare Taxes. A 1.45 percent Medicare tax applies to wages paid to an employee. This tax is imposed upon, and paid by the employer. There is an additional .9 percent tax applied to wages in excess of $200,000 (for tax year 2017).
• Federal Unemployment Taxes (FUTA). Employers are typically required to pay a FUTA tax equal to 6.0 percent of the wages that were paid to their employees. However, a credit may be allowed for state unemployment taxes paid, which may be allowed to offset the majority of the FUTA tax. The credit for state unemployment taxes is limited to 5.4 percent of wages, leaving a net Federal Unemployment Tax of 0.6 percent in many cases.
• State Unemployment Taxes. Like the Federal government, many states impose an unemployment tax for wages paid to an employee. As mentioned above, unemployment taxes paid to a state may be allowed as a credit against much of the Federal Unemployment Tax that applies.
• Withholding of Federal/State Income Taxes. Individuals typically are not required to withhold and pay federal income taxes for wages paid to a household employee unless the employee requests it and the individual hiring them agrees. If income tax withholding is to be performed, the withholding percentages are calculated on Form W-4 which is completed by the employee.

HOW TO COMPLY WITH THE RULES

Individuals who hire the services of a household employee pay any applicable taxes when they file their personal income tax return. These taxes are calculated on Schedule H of Form 1040. To properly file Schedule H, the individual who hired the employee must acquire a Federal Employment Identification Number (EIN) and use this number when reporting the taxes on Schedule H.

In addition to filing Schedule H and withholding/paying the proper amount of taxes, an individual who hired a household employee will also need to properly prepare forms W-2 and W-3 and submit them to the appropriate people/agency. There are a wide range of services that can be used to properly prepare and submit these forms. Additionally, an individual hiring a household employee should familiarize themselves with the rules regarding eligibility verification requirements and the rules pertaining to submitting form I-9.

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