Your Responsibilities When Employing Household Help

This brochure provides a summary of the requirements faced by taxpayers who employ household help. You should always discuss with your CPA your situation regarding hiring household workers before making any decisions concerning this issue.

After "nanny tax" problems became a national issue in 1993, federal tax legislation was enacted in 1994 to make compliance with federal tax laws for household help easier. As a result, several of the reporting requirements have been shifted from different forms to a taxpayer’s 1040. Many taxpayers are now becoming aware that they have tax filing obligations to fulfill when they hire regular household workers.

"Nanny taxes" is a term used to describe the various tax requirements that must be followed by some taxpayers who employ domestic help. Wealthy taxpayers employing live-in household help are not the only people who find themselves owing nanny taxes and needing to complete various forms related to the domestic employment. A taxpayer who hires a daily afternoon baby-sitter or a weekly maid may have established an employer-employee relationship and may owe social security and medicare, federal and state withholding, and unemployment taxes and employer’s share of payroll taxes, and have to complete various forms required of employers of domestic help.

This brochure will help you understand the circumstances under which household employers are required to comply with the nanny tax rules, as well as the specific details of how to follow the tax obligations.

IS THE WORKER AN EMPLOYEE?

First, a taxpayer needs to determine whether an employee-employer relationship exists, or whether the worker is considered an independent contractor or controlled by an agency. Employee status is determined with no regard to whether the work is part-time or full-time. If an individual is controlling what work is to be done and how it is to be done then that person is considered an employer. Taxpayers, who are not employers of the individuals they hire, do not withold employee taxes or pay employer’s payroll taxes. There are numerous other factors that are to be considered when determining an employer-employee relationship. To become more informed on this subject contact this firm and request the brochure titled, "Independent Contractor or Employees."

TAX OBLIGATIONS OF HIRING A HOUSEHOLD EMPLOYEE

If an employer-employee relationship exists, the employer needs to understand the tax requirements for employing a domestic worker. If an individual is hired for a small, one-time job or for sporadic work, employers are generally not required to comply with the following requirements for domestic workers hired for recurring and consistent service.

Complete Form I-9

When hiring a household help employee the employer must verify that the individual is eligible to work in the United States. The employee and the employer must both complete the form I-9, Employment Eligibility Verification. The employer will need to review certain documentation such as birth certificate, driver’s license, or passport to confirm eligibility.

Employer Identification Number (EIN)

All employers, including employers of household help, need to have an EIN. An EIN can be obtained from the IRS after completing Form SS-4.

Social Security and Medicare Taxes

The employer must withhold 6.2% of the employee’s wages for social security and 1.45% for medicare taxes. The employer will have to match those amounts and pay the employer share of the tax after reporting it on Schedule H of the employer’s Form 1040. Employers of a household worker may want to increase withholdings or estimated tax payments to avoid having a large amount of tax due when their 1040 is filed. Estimated tax penalties are calculated by including employment taxes. The payment or employers taxes is not an itemized deduction. No security or medicare taxes are withheld if the household employee is paid less than $1,000 in annual wages. If the household employee is under the age of 18 for any portion of the calendar year then they also are exempt from having wages taxed for social security and medicare.

Income Tax Withholding

A household employer is not required to withhold federal income tax from a household employee’s wages. If the employee requests that federal income tax be witheld then the employer may withhold it if they agree. If the federal income taxes are withheld Form W-4 must be completed. Domestic employee benefits such as food, clothing, and lodging are only taxable for federal income taxes. Withheld federal taxes are due at the end of the year and reported on the household employer’s Schedule H. Form W-2 must be completed at the end of the year and sent to the Social Security Administration. The household employee must be given his or her copy of Form W-2.

Federal Unemployment Taxes

A household employer must pay federal unemployment tax if the employee earned $1,000 or more per quarter of the current year or the prior year, This is also reported on Schedule H.

Virginia Responsibilities

Virginia requires that employers register using Form R-1 which will facilitate monthly filing of Form VA-5 to pay income tax withheld. Employers must also file quarterly reports with the Virginia Employment Commission after registering with them.

Earned Income Credit Requirements

The Earned Income Credit (EIC) is a refundable tax credit for less then $10,580 a year. If a household employee who is eligible for the EIC has social security, medicare, and income tax withholdings and completes form W-5, advance payments of the EIC must be made by the employer from the withheld taxes if the employee requests so.

PENALTIES FROM NONCOMPLIANCE

Civil and criminal penalties could apply if a household employer fails to meet employment tax obligations. Criminal convictions usually result from mostly intentional, rather than negligent, violations of the domestic employee tax laws. However, household employers who are negligent in failing to comply with tax requirements for employees may be subject to civil penalties as well as interest on unpaid taxes.