If You Have Household Help, You Probably Have Tax Obligations
Eileen Cozzi, CPA, JD, LLM
If you directly employ a nanny, housekeeper, cook, gardener, health care assistant or other employee in your home, it is critical that you stay on top of your tax obligations (commonly referred to as the “nanny tax”). This newsletter contains a quick overview of what household help employers need to withhold and file with the IRS.
Nuts and bolts
Specific tax obligations vary depending on the type of tax. For example, you are not required to withhold federal income taxes (or state income taxes in most cases) from a household employee’s pay, unless the employee asks you to withhold and you agree. In that case, have the employee complete Form W-4 and then withhold income taxes on both cash and noncash wages (other than certain meals and lodging).
With FICA (payroll) taxes, withhold amounts for Social Security and Medicare if your household employee’s cash wages reach a specified threshold ($2,400 for 2022). If you meet the threshold, pay the employer’s share of Social Security taxes (6.2%) and Medicare taxes (1.45%) on the cash wages, but not on meals, lodging or other noncash wages. In addition, withhold the employee’s share of these taxes (also 6.2% and 1.45%), although you may opt to pay the employee’s share rather than withholding it from their pay. Note: You may need to withhold additional Medicare tax if you pay an employee more than $200,000 in a calendar year.
There is no FICA tax liability for wages you pay to certain family members or to household employees under the age of 18 if working for you is not their principal occupation. A student who babysits on the side would be one example.
Additionally, you must pay federal unemployment tax (FUTA) if you pay total cash wages to household employees (other than certain family members) of $1,000 or more in any quarter in the current or preceding calendar year. A 6% tax rate applies to the first $7,000 of an employee’s cash wages, although credits for state taxes reduce that rate to 0.6% in most cases. Ask your tax advisor about possible state tax responsibilities.
Using Schedule H
Unlike businesses, you generally do not need to file quarterly employment tax returns for household employees. Instead, report household employment taxes on Schedule H of your personal income tax return. But if you own a business as a sole proprietor, you may add the taxes for household employees to the deposits or payments you make for your business employees and include household employees on certain IRS forms, such as Forms 940 and 941.
Even if you report household employment taxes on Schedule H, you may want to pay the tax throughout the year, either via quarterly estimated tax payments or by increasing withholding from your wages. Otherwise, you will have to pay the tax when you file your return and may be subject to penalties for underpayment of estimated tax. Also, file Form W-2 if you are required to withhold FICA taxes or have agreed to withhold income taxes for a household employee.
Your advisor can help
People working in your home are not necessarily household employees. You generally are not required to withhold or pay taxes for independent contractors such as occasional babysitters who work for many different families. However, the rules for distinguishing between employees and contractors are complicated. Also, employers can be subject to additional obligations that include complying with minimum wage and overtime requirements, and documenting immigration status. Your tax advisor can help you with these issues.
Health Savings Accounts: A Can’t-Pass-up Savings Proposition
Dan Newman, CPA
Does your employer offer employees a Health Savings Account (HSA)? If so (and if you don not already take advantage of it), you should take a second look. HSAs often are referred to as “medical IRAs” because they enable participants to save money while deferring — and, when paying for eligible expenses, eliminating — taxes. With health care costs high and rising, you cannot afford to overlook this opportunity.
How to participate
Some employers with high-deductible health plans (HDHPs) offer HSAs. You may also set up an HSA on your own through a bank or insurance company that offers them. To participate, you must be enrolled in an HDHP, have no other insurance and not yet be enrolled in Medicare. Contributions may be made to an HSA by you, your employer or both. Family members and others also may contribute.
Employers generally can contribute as much as they want to your HSA, but there is a limit to the annual amount you can contribute. For 2022, it is $3,650 for you or $7,300 for family coverage. If you are age 55 or older, you can make additional catch-up contributions of $1,000. You can contribute to your HSA until the federal tax return deadline (for example, April 18, 2022), even if the contribution is for the prior year.
HSA participants may withdraw amounts for qualified out-of-pocket medical expenses, such as physician and dentist visits, without tax consequences. You may also use your balance to cover co-pays and deductibles. However, HSAs generally cannot be used to pay health insurance premiums.
Tax advantages and more
As mentioned, contributions to an HSA are tax-deductible. You can make contributing easy by enrolling in an automatic payroll deduction program that withdraws pretax funds from your paychecks. Also, any earnings within your HSA account are tax-free. HSA funds may be invested in a range of securities, including mutual funds, stocks and bonds, depending on your employer’s plan.
Additionally, withdrawals used to cover qualified medical expenses are not subject to tax. The list of qualified expenses is extensive and ranges from eyeglasses to root canals to fertility treatment drugs. For a detailed list, review IRS Publication 502.
If you have money left over in your HSA at the end of the year, it remains for the following year. This feature provides a distinct advantage to HSAs over flexible spending accounts (FSAs). Any unused balance in an FSA at year’s end usually is subject to a limited carryover. And in most cases, FSA balances are forfeited.
You can use your HSA to pay for expenses even after you have retired. There is no time limit for withdrawals. Also, HSAs are portable, so you can continue to use your HSA if you change jobs or insurance carriers.
Be aware of drawbacks
HSAs also have some drawbacks. For example:
- You can use HSA funds only for health care expenses. If funds are used for nonqualified expenses, the account withdrawal will be subject to tax. The IRS will also tack on a 20% penalty if you are younger than age 65. (Compare this with a 10% tax penalty for early withdrawals from traditional IRAs before age 59½.)
- In some cases, HSA providers charge monthly account fees or transaction fees. Also, you could be subject to extra charges for account overdrafts or deposits that do not clear your bank.
- If you die and leave your HSA to beneficiaries, the account funds may not enjoy the same tax benefits. In general, a spouse beneficiary who assumes an HSA as their own can make tax-free withdrawals for qualified expenses. But for other beneficiaries, the account will no longer be treated as an HSA and is subject to tax.
And, of course, HSAs are only available to employees enrolled in HDHPs.
Health cost burden
As health insurance costs rise, many employers expect their employees to shoulder more of the burden. If you have an HDHP, an HSA can help you reduce that burden.