How do household employees impact taxes?

Plumbers, repairmen, and other contractors that provide services at your home are independent contractors and you have no requirements other than to pay their bills for their services. However, household employees like nannies, housekeepers, maids, and possibly even gardeners that work at your home as employees you may be responsible for employment taxes for them. The distinction is that employees are workers you can control how they do their work and when they do it while independent contractors can, for the most part, complete their work on their time schedule and in their own way. Most often we see employment tax requirements come up with children’s nannies, but it can include the other persons mentioned above if they are employees and not independent contractors.

What are employment taxes?

Employment taxes are the Social Security and Medicare taxes on cash wages if you pay a household employee more than $1,900 in 2014. Generally you as the employer would be required to withhold the employee portion (6.2% of Social Security and 1.45% of Medicare) of employment taxes from all cash wages that you pay to them. As the employer you are responsible for paying the other 7.65% portion for a total of 15.3% in Social Security and Medicare taxes paid in for each employee. Some employers opt to not withhold any employment tax which is acceptable, but keep in mind that you will be responsible for paying the entire 15.3% amount. Employment taxes are not required to be withheld or paid for your spouse, your child if under age 21, your parent, or an employee that is under age 18 unless that is their primary occupation.

What are the filing requirements?

At the end of the year a Form W-2 (Wage and Tax statement) will need to be filled out for each employee. In addition, depending on the amount paid to the employee, you may be required to file and pay Federal Unemployment Tax and State Unemployment Tax. On your individual income tax return Schedule H – Household Employment Taxes is filled out to report the amounts paid and calculate the employment taxes owed. Just like regular income tax these employment taxes can be paid in on a quarterly basis so taxpayer’s are not stuck with a large tax bill at the end of the year.

We have found that most payroll companies can keep household employers in compliance at a low cost to you as the filing requirements can be complicated. If you are considering hiring a fulltime or even part-time household employee it is important to know your filing requirements and stay in compliance.