Tax Tips
The Golden Rule for Household Employees - September 2007
Richard Scrivanich - Partner
If you employ household help, including babysitters, home health aides, gardeners, chauffeurs, valets, housecleaners, and others, you already know how important it is to treat them properly. The Golden Rule, treat others as you would like to be treated, always applies. Moreover, if you want to avoid late charges and penalties down the road, you must also conduct yourself correctly by paying taxes for these services.
The payments you make to your household employee(s) may give rise to (1) deducting particular types of taxes, (2) remitting certain taxes, and (3) filing appropriate tax returns.
When your "help" becomes your "employee"
Internal Revenue Service (IRS) rules determine whether household workers are actually employees. Factors in making this determination include whether you, as the employer, have control over what work gets done and how that work is effectuated. Examples of this control include your determination of:
- When and where to do the work
- What tools or equipment to use
- What order or sequence to follow
- Where to purchase supplies and services
- What work must be performed by a specific individual
- What workers to hire or to assist with the work
Using an Agency
If you think that hiring household help through an agency precludes characterizing that worker as your employee, and thereby eliminates your obligation to pay employment taxes, think again. Under the IRS definition of household employee, it is irrelevant that your help was provided to you by any agency, let alone how frequently you pay the person or whether the person works full- or part-time for you.
Independent Contractors
In contrast, the worker will not be considered your employee-but rather an independent contractor who works for him- or herself-if that person controls how the work is to be done. These workers typically include contractors, plumbers, repair people, and others. Nevertheless, these workers can also be employed by an agency that contracts and controls what work will be done, and how it will be performed. Under these circumstances, such workers are probably employees of the agency, not you, and the agency pays their employment taxes.
The nanny tax
Clients, often unclear about their obligation to report the income they pay to their domestic employees, sometimes forget to inform their CPAs about their domestic help.
Depending on how much you pay someone in a given year, you must pay employment taxes. These taxes apply to all your household employees who work in or around your private residence. Such taxes became popularly known as the "nanny tax" when national news stories reported that well-known politicians and others failed to pay employment taxes for their nannies, who also happened to be undocumented aliens.
You should discuss with your employees whether to withhold income taxes for them, because they have the option to do their own withholding. As a household employer, you are required to account for household workers on Form 1040 Schedule H for any year in which they are deemed your employees and, therefore, qualify for either Social Security and Medicare or Federal Unemployment Tax Act (FUTA) withholding. You should pay employment taxes quarterly through estimated payments or by increasing the withholding from paychecks. A number of states have simplified nanny tax requirement, while others do not and treat you as a regular employer. As an employer, you must also consider the various legal ramifications of having employees, including the immigration status of your workers and worker's compensation insurance.
Unemployment tax
Depending on the amount paid to a household worker during a quarter, you may be required to pay FUTA. Please note that this tax rate may be significantly decreased if you have made all required payments into your state's unemployment fund.
Social Security and Medicare
Workers under the age of 18 are exempt from Social Security and Medicare taxes that arise from wages paid for household employment, with certain exceptions. These taxes also do not generally apply to wages paid to a household employee if that employee is the spouse of the employer, a child (under the age of 21) of the employer, or, in most cases, the employer's parent.
Other considerations
You should also consider whether it would be a good idea for you to add household employees to your home owner's and/or auto insurance policies.
If you have any questions regarding household employees or any other tax matter, please feel free to give me a call at (562) 698-9891.
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Some of the articles included here were written in a prior
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relate only to the year for which the article was written and could be different
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acting on any of the information provided. If you have any questions,
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