When you hire a housekeeper, nanny or other domestic worker, you do not just acquire an employee, but also a set of tax responsibilities. Proper filing and reporting enables your worker to build an employment record and gain access to Social Security, Medicare and other benefits. This also helps protect you from potentially expensive and time-consuming legal trouble.
In general, if you pay a household worker at least $2,100 in 2018, you also must pay Social Security taxes of 6.2% on cash wages of up to $128,400, as well as a Medicare tax of 1.45% on all cash wages. Cash wages includes compensation paid by check or money order, but not the value of food, lodging or other non-cash compensation.
You also need to withhold and remit the employee’s share of Social Security (6.2%) and Medicare (1.45%) taxes. If you cover the employee’s share yourself (adding up to 7.65%), include that amount as additional wages for income tax purposes, but not for reporting Social Security and Medicare.
If you pay an employee at least $1,000 in any calendar quarter, you may owe federal unemployment (FUTA) tax. This is 6% of the employee’s cash wages — up to $7,000 each year — though this amount may be offset by a credit. Some states also impose their own unemployment tax.
Keeping good records
For all domestic workers, you will need to keep records of:
- Social Security numbers;
- Cash and noncash wages paid; and
- Taxes withheld or paid.
Retain this information for at least four years after the due date of the tax return on which the taxes were reported. In addition, obtain an Employer Identification Number (EIN).
By January 31 of each year, provide your employees with copies B, C and 2 of IRS Form W-2 (“Wage and Tax Statement”) for the previous year. Send copy A of the W-2 to the Social Security Administration. When you file your income tax return, complete and attach Schedule H, “Household Employment Taxes.” After calculating the total amount of Social Security, Medicare, FUTA and withheld federal income tax, you will add this to your income tax liability for the year. There may also be state filing requirements.
To avoid having to pay household employee taxes when you file your return, you can make estimated payments throughout the year. Or, if you are employed, you can ask your employer to increase the amount of federal income tax withheld to cover these taxes.
Exceptions to the rules
Tax and reporting obligations do not necessarily apply in some circumstances, even if an employee’s annual wages total more than $2,100. Examples include when the employee is your spouse, parent or child (and is under age 21) or the employee is unrelated to you but under age 18.
Using an independent contractor, rather than hiring someone as your employee, can also relieve you of some tax and reporting obligations. But, the individual must actually be an independent contractor. The distinction between employee and contractor hinges on several factors, including how much control workers have over their work, and whether they offer services to the general public.
See “Employee or Independent Contractor? Worker Classification Matters” for more information.
Administrative tasks related to employing household help can be complicated. Before placing a want ad, talk to your tax advisor. You may also want to consider contracting with a tax professional or payroll service that specializes in domestic workers.
For more information, contact Jacqueline Janczewski at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.