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Household Employers’ Tax Obligations
If you contract workers to help around your personal residence and pay them more than $2,300 a year, you are required to pay and withhold FICA taxes on your workers’ behalf. The government considers these workers as personal employees of your household, regardless if they work part-time or full-time. As the legal employer, you are responsible for abiding by state, federal, and local tax laws surrounding these forms of employment. Whether you employ one or several individuals, here’s what you need to know about payroll tax requirements for your household employees.
Understanding Household Employees
According to the IRS, a household employee (also referred to as a domestic employee) is someone hired to provide services at your personal residence, but only if you control the work that is being done and how the work is accomplished. Examples of common household employees included nannies, personal assistants, babysitters, gardeners, personal cooks, and house cleaners.
Household Employees Vs. Independent Contractors
Since you, as the employer, give specific instructions to your domestic employees, you cannot register them as independent contractors. Repairmen, carpenters, and plumbers are examples of independent contractors who offer a service using their own equipment and who control how they execute their work. Your domestic employers follow your specific institutions and perform tasks under your conditions; therefore, it is important to understand the difference between these two groups. Independent contractors have a different process for handling taxes and receive a Form 1099 at the end of the tax year. Because they are their own employers, they handle their taxes themselves. Your domestic employees will file a Form W-2 instead and split taxes with you, their employer. Not properly understanding these differences can result in expensive fines and tax evasion charges for you as the employer.
If you are a business owner, you cannot claim your domestic employees within your business’ tax deductions. Although businesses are legally entitled to a tax deduction on the employer’s payroll tax, household employees are not considered to be part of your business. This is a tax violation that can be costly to business owners. The IRS requires you to handle domestic employees’ wages through your personal tax process.
When Schedule H Must Be Filed
If you pay household employees more than $1,000 per calendar quarter or over $2,300 during a calendar year, you are required to file a Schedule H, which is filed with your personal income tax return. This form specifically reports household employment taxes to the IRS and does not include any cash wages paid to your spouse, parents, or children under the age of 21. The household employment taxes that you have to report on Schedule H cover the three taxes withheld from all employment wages: 12.4% Social Security tax, 2.9% Medicare tax, and 6% federal unemployment tax (FUTA). Because your household employees do not contribute to federal unemployment taxes through withholdings, you are legally responsible for paying the entirety of FUTA. On the other hand, employees pay the other half through withholdings from their wages. After filing your Schedule H, the IRS will calculate both the amount you should have withheld and the amount you owe. You will then receive a reduced FUTA rate after filing your Schedule H for paying state unemployment insurance taxes.
Household Employer Tax Filing Responsibilities
As a household employer, you are responsible for filing a variety of federal and state forms on behalf of you and your household employees. Many of these documents are required to be completed prior to your household employee beginning work. The forms that need to be completed are as follows:
- Form I-9: Domestic employees are required to fill out this form once they are hired and provide necessary proof of identification.
- Form W-4: Domestic employees must complete this form to allow the employer to calculate the amount of federal income tax withholding.
- Form W-2: Household employers must file this form if they paid wages to an employee. They must also provide Copies B, C, and 2 to domestic employees. Copy A, along with Form W-3, is sent to the Social Security Administration.
- Schedule H: A household employer that pays domestic employees more than $1,000 a calendar quarter or over $2,300 per calendar year is required to file a Schedule H form.
- DE 4: Domestic employees must complete this form so that the employer can calculate how much California income tax is to be withheld for the domestic employee.
- DE 9, DE 9C, DE 88: These reports must be filed to the State every quarter, along with payment to report taxes and the quantity of wages paid in the previous quarter. Each state will have its own specific requirements for these forms.
- Form W-10: This form is used to collect information surrounding a domestic employee if the employer plans to claim a credit for child and/or dependent care expenses on their personal tax filing. This also applies to benefits received under the employer’s dependent care or flexible spending plan.
Some states may also have different requirements for household employers. These could include:
- Unemployment Identification Number: Household employers may be required to obtain an unemployment identification number through the state where the requested work will be performed. This is needed to pay quarterly state unemployment taxes.
- Withholding Certificate: This is required from employers and employees who want to withhold state income taxes. Your respective state agency will provide you with an ID number, coupon booklet, and instructions on how to submit withholding taxes.
- New Hire Report: New employees must be registered with the state within a certain time frame of the hire date.
Household employers may have certain record retention requirements, which will vary by state. It is generally a good practice to retain basic records for each domestic employee, such as the employee’s name, Social Security number, daily and weekly work hours, amount of cash wages if the employer pays the employees in cash, and overtime wages.
If you are someone who employs domestic workers in your private residence and needs assistance with keeping track of your payroll tax, call Coast One Tax Group and receive the necessary help from a tax resolution professional. Our team can help you properly handle your tax obligations with ease and thoroughness.