Tax Challenges of Hiring Household Employees
If you hire someone to care for a child or an elderly relative or to perform household duties, you could be taking on a new role - that of an employer. As an employer, you may be required to withhold and pay Social Security and Medicare taxes, and, possibly, Federal and state unemployment insurance, according to the Colorado Society of CPAs. The answers to the following questions can help you determine your responsibility and avoid penalties.
Who is considered a household employee?
A household employee is someone you hire to work in your home caring for your children, cleaning your house, cooking meals, gardening, or providing similar domestic services. If you control the work hours, work place, and work tools, the worker is your employee. Workers who provide their own tools, set their own hours, and offer services to the general public are generally self-employed.
How do I know if I'm required to pay employment taxes?
If you pay a household worker $1,400 or more in cash in 2004, you must pay Social Security and Medicare taxes (often referred to as FICA taxes) on the employee's wages. You and the employee each owe an amount equal to 7.65 percent of the wages. Technically, you are responsible for payment of your employee's share as well as your own. You can withhold your employee's share from his or her wages or pay it from your own funds.
Are there any exceptions?
You are not required to pay employment taxes on wages you pay to your spouse, your child under age 21, your parent (unless an exception is met), or an employee who is under age 18 at any time during the year, providing that performing household work is not the employee's principal occupation. If the employee is a student, providing household work is not considered his or her principal occupation.
Must I pay unemployment taxes?
Like most employers, you may be required to pay Federal unemployment taxes (FUTA) and, possibly state unemployment taxes. If you pay cash wages to household employees totaling $1,000 or more in any calendar quarter of 2004, the first $7,000 of cash wages you pay in 2004 and 2005 are FUTA wages.
The FUTA tax is 6.2% of your employee's FUTA wages. You may, however, be eligible for a credit of up to 5.4%, resulting in a net FUTA tax of 0.8% if you pay state unemployment compensation taxes. You must not withhold FUTA tax from your employee's wages. You must pay it from your own funds.
What about Federal income tax?
You are not required to withhold Federal income tax from the wages you pay a household employee. However, if your employee requests you to and you agree, you may do so.
How do I make tax payments?
Employers of household workers use Schedule H, Household Employment Taxes, to compute total household employment taxes (Social Security, Medicare, FUTA, and withheld Federal income taxes). You add the household taxes due to your income taxes and pay the total by your filing due date. If you are a sole proprietor and file Form 941-SS for business employees, you may report the employment taxes for your household worker on that form.
Are there any other reporting requirements?
If you owe any FICA or FUTA taxes or if you withhold income tax from your employee's wages, you need an employer identification number (EIN). Visit the IRS website or call 1-800-829-3676 for information.
For work done in 2004, you must complete Form W-2, Wage and Tax Statement, and provide your household employee with copies B, C, and 2 by January 31, 2005. You must send Copy A of Form W-2, along with a transmittal form (W-3), to the Social Security Administration by February 28, 2005. For more detailed information, contact your CPA.
What happens if I don't report and pay employment taxes?
Employers who fail to pay employment taxes on household help may be subject to criminal and civil sanctions. Generally, employers are required to pay back taxes, penalties and interest charges. CPAs point out that since there is no statute of limitations on the failure to report and remit federal payroll taxes, you can essentially be audited by the IRS at any time.