If you pay someone to come to your home and care for it, your dependent, or your spouse, you may be a household employer. If you are a household employer, you will need an employer identification number (EIN) and you may have to pay employment taxes. If the individuals who work in your home are self-employed, you are not liable for any of the taxes discussed in this section. Self-employed persons who are in business for themselves are not household employees. Usually, you are not a household employer if the person who cares for your dependent or spouse does so at his or her home or place of business.
EXCEPTION
Employees under the age of 18 at any time during the year are exempt from social security and Medicare taxes, regardless of how much they earn, provided household services are not their main job. If the employee is a student, providing household services is not considered to be his or her principal occupation.
TAXPLANNER
Paying the “nanny” tax. Employers are required to report the social security, Medicare, and federal unemployment taxes due on domestic workers’ wages on the employer’s Form 1040, Schedule H. The taxes can be paid through the employer’s estimated tax payments. Alternatively, the employer could increase federal withholding on his or her own wages and pay these taxes on the domestic worker in that manner.
If you use a placement agency that exercises control over what work is done and how it will be done by a babysitter or companion who works in your home, that person is not your employee. This control could include providing rules of conduct and appearance and requiring regular reports. In this case, you do not have to pay employment taxes. But, if an agency merely gives you a list of sitters and you hire one from that list, the sitter may be your employee.
If you have a household employee you may be subject to:
Social security and Medicare taxes,
Federal unemployment tax, and
Federal income tax withholding.
Social security and Medicare taxes are generally withheld from the employee’s pay and matched by the employer. Federal unemployment (FUTA) tax is paid by the employer only and provides for payments of unemployment compensation to workers who have lost their jobs. Federal income tax is withheld from the employee’s total pay if the employee asks you to do so and you agree.
For more information on a household employer’s tax responsibilities, see Publication 926 and Schedule H (Form 1040) and its instructions.
State employment tax. You may also have to pay state unemployment tax. Contact your state unemployment tax office for information. You should also find out whether you need to pay or collect other state employment taxes or carry workers’ compensation and/or disability insurance. For a list of state unemployment tax agencies, visit the U.S. Department of Labor’s website at https://workforcesecurity.doleta.gov/unemploy/agencies.asp
You may be able to claim a child and dependent care credit for the expenses you incur for domestic help. See chapter 33 , Child and dependent care credit , for more information.
Janice is single and works to keep up a home for herself and her dependent father. Her adjusted gross income of $25,000 is entirely earned income. Her father was disabled and incapable of self-care for 6 months. To keep working, she paid a housekeeper $600 per month to care for her father, prepare lunch and dinner, and do housework. Her credit is as follows:
Total work-related expenses (6 × $600) $3,600
Maximum allowable expenses
$3,000
Amount of credit (30% of $3,000) $900
EXPLANATION
Employee or independent contractor? Whether or not a person who provides services in and around your house is your employee depends on the facts and circumstances of the situation. In general, a person is your employee if you control his or her working conditions and compensation. A person does not have to work for you full time to qualify as your employee.
Generally, workers are classified based on how they perform their work and their accountability for it. By definition, independent contractors are responsible for results, not how their tasks are accomplished. On the other hand, individuals who are instructed as to when, where, and how to complete their jobs would probably be considered employees. If you determine that your domestic helpers are employees, you must withhold and match social security and Medicare payments and may be subject to paying federal and state unemployment taxes as well.
To gain a better understanding of the distinction between an independent contractor and an employee, consider the person who mows your lawn. If the person works for an independent lawn service and is supervised by the lawn company that also provides its own equipment—all you provide is the grass—there’s little question that the provider is an independent contractor. However, if a college student cuts your lawn using your mower, and you give specific instructions as to how and when to do the job, he or she will be considered your employee.
To enable you to determine whether a person is indeed an independent contractor, there are certain common indicators that can help. An independent contractor:
Works for several homeowners
Provides his or her own tools and supplies to perform the job
Can bring in additional help if he or she deems necessary
Determines how the results will be accomplished
Is paid by the job, not by the hour
Advertises his or her services
May be fired at will
Can set his or her own hours and leave when the job is completed
If you have reason to believe that a person is an independent contractor and not your employee, you should not withhold social security tax from his or her compensation. You may want to get a signed letter from this person indicating that he or she is an independent contractor and is responsible for his or her own employment taxes.
Table 41.1 Household Employer’s Checklist
You may need to do the following things when you have a household employee.
When you hire a household employee:
Find out if the person can legally work in the United States.
Find out if you need to pay state taxes.
When you pay your household employee:
Withhold social security and Medicare taxes.
Withhold federal income tax.
Decide how you will make tax payments.
Keep records.
By January 31, 2018: Get an employer identification number (EIN).
Give your employee Copies B, C, and 2 of Form W-2, Wage and Tax Statement .
By January 31, 2018: Send Copy A of Form W-2 to the Social Security Administration (SSA).
By April 17, 2018: File Schedule H (Form 1040), Household Employment Taxes , with your 2017 federal income tax return (Form 1040, 1040NR, 1040-SS, or Form 1041). If you do not have to file a return, file Schedule H by itself.
Table 41.2
If your legal residence is located in: Mail or Fax Form SS-4 to:
One of the 50 states or the District of Columbia Internal Revenue Service Attn: EIN Operation Cincinnati, OH 45999 Fax-TIN: (855) 641-6935
If you have no legal residence, principal place of business, or principal office or agency in any state: Internal Revenue Service Attn: EIN International Operation Cincinnati, OH 45999 Fax-TIN: (855) 215-1627
TAXPLANNER
Records you need. When you hire a household employee, make a record of that person’s name and social security number exactly as it appears on his or her social security card. You will need this information when you remit social security, Medicare, federal unemployment, and withholding of federal income taxes.
An employee who does not have a social security number should apply for one using Form SS-5, Application for a Social Security Card . This form is available at all Social Security Administration offices, or on the Social Security Administration website at www.socialsecurity.gov/online/ss-5.pdf , as well as by calling 1-800-772-1213.
If your employee is not eligible to obtain a social security number, he or she may obtain an individual taxpayer identification number (ITIN) by filing Form W-7 with the IRS. The ITIN can be used on a tax return wherever a social security number should be used. You should note that the ITIN is
Employer identification number (EIN). In order to pay federal taxes for your household employee, you will need an employer identification number (EIN). This is a nine-digit number issued by the IRS. It is not the same as your social security number. If you already have an EIN, use that number. If you do not have an EIN, you can apply for it online. Go to www.irs.gov and enter keywords “Apply for an EIN Online” in the upper right-hand corner. From this web page, you can access a web-based application that instantly processes requests and generates EINs in real time. Note that phone requests for domestic EIN numbers are no longer accepted. As of January 6, 2014, the IRS now refers all domestic EIN requests received by phone to the EIN Online Assistant. You can also apply for an EIN by fax or mailing in Form SS-4, Application for Employer Identification Number . Form SS-4 is available at www.irs.gov/pub/irs-pdf/fss4.pdf . If you choose to submit Form SS-4 you will need to send it to the IRS office listed in Table 41.3 for your location. If you need further information regarding the IRS process for issuing an EIN number, call or fax the IRS office in your area or refer to Publication 926, Household Employer’s Tax Guide .
Social Security and Medicare Taxes (FICA)
If you pay a household employee cash wages of $2,000 or more during a calendar year, those wages are subject to social security and Medicare taxes. Cash wages include wages you pay by check or money order, but do not include the value of noncash items you give your household employee. Cash you give your employee in place of a noncash item, such as clothing or gifts, is included in cash wages. Payments in kind (meals, transportation, etc.) are not used to figure the $2,000 amount or to figure the taxes. Taxes are figured on all cash wage payments made to the employee during the year, regardless of when they were earned.
What is taxable compensation? Table 41.3 may help to clarify what is reportable income to your employee. Remember that state and local income tax and unemployment or disability and other employment tax rules may be different.
Family members. Social security and Medicare taxes do not apply to household services performed by your spouse or by your child under 21. However, social security and Medicare taxes apply to wages you pay your parents for household services if:
You are a surviving spouse or a divorced individual who hasn’t remarried or have a spouse living in the home who has a mental or physical condition that results in the spouse’s being incapable of caring for a child or stepchild for at least four continuous weeks in the quarter in which the service is performed; and
Your child or stepchild is living in the home; and
Your child or stepchild is under age 18 or has a mental or physical condition that requires the personal care of an adult for at least four continuous weeks in the calendar quarter in which the service is performed.
Table 41.3
Federal Income Tax Social Security and Medicare (FICA) Federal Unemployment Tax (FUTA)
Salary paid by cash, check, or other means Yes Yes Yes
Cash bonus (overtime, holiday, etc.) Yes Yes Yes
Cash gifts (holiday, birthday, wedding, etc.) Yes Yes Yes
Gifts of property (holiday, birthday, etc.)1 Yes Yes Yes
Vacation pay Yes Yes Yes
Sign-on bonus Yes Yes Yes
Value of meals & lodging on your premises as part of job and for your convenience No No No
Car provided to employee for commutation Yes Yes Yes
Car provided to employee to do work for you only No No No
Cell phone2 Maybe Maybe Maybe
Value of public transit passes provided (up to $255 per month for 2017)3 No No No
Value of parking provided (up to $255 per month for 2017) No No No
Insurance for employee’s own car Yes Yes Yes
Employee’s medical insurance bills you pay No No No
Uniforms you give to employee to wear on your premises No No No
Cash uniform allowance Yes Yes Yes
Value of vacation when nanny accompanies family to care for children No No No
Employee’s legal fees you pay Yes Yes Yes
Employee’s social security taxes you pay Yes No Yes
Employee’s income taxes you pay Yes Yes Yes
TAXALERT
If a person is an employee whom you pay a total of $2,000 or more per year, you have tax filing and payment responsibilities.
TAXALERT
Babysitters. If the babysitter watches your children in your house at the time you specify, IRS rulings conclude that the person is an employee. It’s not enough to stop giving the sitter a ride home in an attempt to make him or her appear more independent. You would need to use sitters who watch children in their homes or other facilities during set business hours. Or you can rotate sitters to avoid paying anyone more than $2,000 per year. As previously noted, sitters under age 18 who are full-time students are exempt from social security and Medicare taxes.
Paying the tax. You and your household employee each pay a share of the social security and Medicare taxes due on the employee’s wages. For 2017, the social security tax rate applicable to your employee is 6.2% of wages received. The rate assessed to you as the employer contribution is an additional 6.2%. This combined tax rate of 12.4% applies only to the first $127,200 you paid each employee during calendar year 2017.
The Medicare tax rate is 1.45% for you and your employee each—a combined total of 2.9%. Under the Affordable Care Act, higher income employees are subject to an additional 0.9% Additional Medicare Tax on wages and other compensation over $200,000 for single filers and $250,000 for married taxpayers filing jointly ($125,000 if married filing separately). For married couples filing jointly, the additional tax is imposed on the combined wages of the employee and the employee’s spouse. The 0.9% Additional Medicare Tax is imposed on the employee only; there is no employer share of the Additional Medicare Tax. However, the employer must withhold the additional 0.9% tax beginning in the pay period in which wages in excess of $200,000 are paid to an employee. For more information on Additional Medicare Tax, visit www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Questions-and-Answers-for-the-Additional-Medicare-Tax .
You must pay the total of these taxes (your employee’s and your share) yourself if you do not deduct the employee’s share from his or her wages. Any of the employee’s share you pay is added income to the employee. This income must be included in box 1, Wages, tips, other compensation , on Form W-2, Wage and Tax Statement , but do not count it as cash wages for social security and Medicare purposes. You must also include the employee’s social security and Medicare taxes you pay in boxes 4 and 6 of the employee’s Form W-2, even though the taxes were not actually withheld.
If you would rather pay your employee’s share of social security and Medicare taxes without deducting it from wages, you may do so. Any portion you do pay, however, is added to the compensation to your employee, even though it does not constitute cash wages for social security and Medicare purposes. Although it may be easier if you pay your employee’s share of social security and Medicare taxes, it does raise your cost. You should come to an agreement with your employee on this issue before he or she begins work.
Example.
TAXPLANNER
Employer-provided cell phones. Under guidance published by the IRS in 2011, when an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the business and personal use of the cell phone is generally nontaxable to the employee. A common example of a noncompensatory business reason to provide a cell phone to a household employee might be the need to contact the employee at all times for work-related emergencies, such as the care and safety of a child or disabled person under the employee’s care. This rule also applies to employer reimbursements of the employee’s expenses for reasonable cell phone coverage as long as the reimbursement is done for noncompensatory business reasons.
This rule does not apply, however, to the compensatory provision of cell phones or reimbursements for cell phone use that are not primarily business related. In other words, if you provide a cell phone or reimburse cell phone expenses to your household employee in order to promote goodwill, boost morale, or attract a potential new employee, the reason for providing the benefit would be considered compensatory. Such arrangements are taxable cash or noncash income, depending on the way the benefit is provided to the employee.
These rules are complex. If you provide a cell phone or reimburse cell phone expenses to a household employee, see chapter 5 , Wages, salaries, and other earnings , and Publication 15-B, Employer’s Tax Guide to Fringe Benefits , for more information.
TAXPLANNER
If you and your employee agree that the employee will be responsible for his or her own share of the social security and Medicare taxes, you should also reach agreement on how it is to be paid. To minimize difficulties, you may want to start withholding immediately rather than wait until $2,000 has been earned each year. This avoids the problem of the employee having to pay you $153 (7.65% × $2,000) once the threshold has been met.
Federal Income Tax Withholding
If your household employee requests income tax withholding, and you agree, you must withhold an amount from each payment based on the information shown on Form W-4, Employee’s Withholding Allowance Certificate , given to you by the employee. See chapter 5 , Wages, salaries, and other earnings , for more information about Form W-4. Publication 15 (Circular E), Employer’s Tax Guide , explains how to figure the amount to withhold.
TAXPLANNER
It is your decision whether or not to withhold income tax from your employee’s compensation, even if withholding is requested by your employee. However, if you do withhold for an employee, everything that you pay your employee—whether cash or noncash—is income subject to withholding. Some of the more common forms of compensation for household employees are (1) salaries; (2) overtime and bonuses; (3) meals, unless provided in your home and for your convenience; and (4) lodging, unless provided in your home, for your convenience, and as a condition of employment. As a general rule, if you have live-in domestic help, any meals and lodging you provide are not considered compensation. A car that you provide solely for use in transporting family members
Any income tax withholding you pay for an employee without deducting it from the employee’s wages is added income to the employee and subject to income, social security, and Medicare taxes.
Form W-4 and Publications 15 (which explains employer responsibilities and requirements), 15-A (which supplements and explains the Publication 15 information in greater detail), and 15-B (which explains the employment tax treatment of fringe benefits) can be requested by calling 1-800-TAX-FORM (1-800-829-3676) or downloaded at www.irs.gov .
TAXPLANNER
You can effectively receive the nonrefundable portion of the EIC through your paycheck by adjusting withholding, to the extent that you otherwise have positive tax liability.
Notice about the earned income credit (EIC). Copy B of the 2017 Form W-2, Wage and Tax Statement , has a statement about the EIC on the back. If you give your employee that copy by January 31, 2018, you do not have to give the employee any other notice about the EIC.
If you do not give your employee Copy B of the Form W-2, your notice about the EIC can be any of the following items.
A substitute Form W-2 with the same EIC information on the back of the employee’s copy that is on Copy B of the Form W-2.
Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC) .
Your own written statement with the same wording as in Notice 797.
If a substitute Form W-2 is given on time but does not have the required EIC information, you must notify the employee within one week of the date the substitute Form W-2 is given. If Form W-2 is required but is not given on time, you must give the employee Notice 797 or your written statement about the 2017 EIC by January 31, 2018. If Form W-2 is not required, you must notify the employee by February 7, 2018.
You must give your household employee a notice about the EIC if you agree to withhold federal income tax from the employee’s wages and the income tax withholding tables show that no tax should be withheld. Even if not required, you are encouraged to give the employee a notice about the EIC if his or her 2017 wages are less than $48,340 ($53,930 if married filing jointly).
You must notify any employees not having federal income tax withheld that they may be eligible for an income tax refund because of the earned income credit.
For more information about employment taxes, see Publication 926, Household Employer’s Tax Guide .
Federal Unemployment Tax (FUTA)
Federal unemployment tax (FUTA) is for your employee’s unemployment insurance. If you paid cash wages of $1,000 or more to household employees in any calendar quarter this year or last year, you are liable for FUTA for any employees you have this year. However, the tax does not apply to wages paid to your spouse, your parents, or your children under 21 years old.
Rate. The FUTA tax is 6.0% of your employee’s FUTA wages. However, you may be able to take a credit of up to 5.4% against the FUTA tax, resulting in a net tax rate of 0.6%. Your credit for 2017 is limited unless you pay all the required contributions for 2017 to your state unemployment fund by April 17, 2018. The credit you can take for any contributions for 2017 that you pay after April 17, 2018, is limited to 90% of the credit that would have been allowable if the contributions were paid by April 17, 2018.
The tax is imposed on you as the employer. Unlike social security, Medicare, and federal income tax, federal unemployment tax is solely an employer’s responsibility. It is an additional cost to you of having domestic help. You must not collect or deduct it from the wages of your employees.
When you hire a household employee, you should contact your state employment tax office to get information on how to file the state return and to get a state reporting number. The state will help you to figure the amount of tax you will pay the state. See the instructions to Schedule H for how to claim the credit.
Credit Reduction States. The 5.4% credit is reduced for wages paid in a credit reduction state (meaning that the states have not yet repaid loans they received from the federal government to pay unemployment claims). In 2015, 3 U.S. states and the U.S. Virgin Islands were designated by
Example 1.
2017 Wages for this employee × FUTA rate $3,000 × 6.0% = $ 180
Wages greater than $7,000 are not subject to FUTA -0- = -0-
TOTAL FUTA TAX FOR 2017
(before state unemployment credit)
$ 180
Example 2.
2017 wages × the FUTA rate $7,000 × 6.0% = $ 420
Wages greater than $7,000 are not subject to FUTA -0- = -0-
TOTAL FUTA TAX FOR 2017 $ 420
(before state unemployment credit)
Unless you own a business as a sole proprietor, you should report these taxes on Schedule H attached to your 2017 Form 1040. These taxes are added to your income taxes. The total must be paid during the course of the year. See chapter 4 , Tax withholding and estimated tax .
If you are a sole proprietor who has nonhousehold employees, you should be filing Form 940 (or 940-EZ) annually to report FUTA (unemployment taxes) and Form 941 quarterly (Form 944 annually for qualifying small businesses) to report and remit federal income tax and FICA (social security and Medicare) tax withholdings. The IRS gives sole proprietors the option of including withholdings and taxes paid for domestic employees with withholdings and taxes paid for nondomestic employees on Forms 940 and 941 or 944. Alternatively, sole proprietors can exclude domestic employees from Forms 940 and 941 or 944 and file Schedule H with their own income tax returns.
TAXALERT
The IRS notifies certain employers that they must file Form 944, Employer’s ANNUAL Federal Tax Return , instead of Form 941, Employer’s QUARTERLY Federal Tax Return . Form 944 is filed once a year, rather than quarterly as Form 941 is filed. Form 944 for calendar year 2017 will be due January 31, 2018. (If you made deposits on time in full payment of the taxes due for 2017, you may file Form 944 by February 12, 2018.) Employers who would otherwise be required to file Form 944 may opt out for any reason if they want to file Form 941 quarterly instead of Form 944 annually. Complete details on the procedure for opting out of filing Form 944 are included in the Form 941 instructions, available at www.irs.gov . Employers who are required to file Form 944 have annual liability for social security, Medicare, and withheld income taxes of $1,000 or less. You cannot file Form 944 unless you have been notified by the IRS. However, if you believe you are eligible to file Form 944—and desire to do so in place of Form 941—you may opt in to filing Form 944 by contacting the IRS at 1-800-829-4933. If the IRS determines that you are eligible to file Form 944, it will send you a written notice that your filing requirement has been changed. Note that you are ineligible to file Form 944 if you employ household employees only.
For more information about annual employment tax filing and deposit rules, see Publication 15, Circular E, Employer’s Tax Guide , available at www.irs.gov .
Whether or not you are a sole proprietor, once you withhold tax from an employee, you must remit the tax to the IRS. If you do not, you could be responsible for substantial fines and penalties.
Example. Employer’s Tax Guide , available at www.irs.gov , for instructions regarding the use of the percentage method and the 2017 Income Tax Withholding Tables. The state in which they reside has a flat income tax of 5% and total unemployment taxes of 9%, of which 2% is to be paid by Emily, and 7% is to be paid by the Boyds on income up to $7,000. The Boyds’ state of residence is not a credit reduction state for 2017.
Since Emily has provided documentation indicating how many miles were driven, for what purpose and when, and since the reimbursement is within the IRS guideline (the standard mileage rate is 53.5 cents per mile for business miles driven during 2017), Emily’s reimbursement for gas is not taxable income to her. Also, since Emily does not have the option of receiving cash for the medical insurance premiums, the reimbursement for medical insurance is not taxable to her.
The worksheet in Table 41.4 summarizes the taxable compensation paid to Emily and the taxes required to be deducted from her pay. The Boyds would provide a Form W-2 to Emily showing taxable earnings of $11,800 and withholdings, as indicated in Table 41.4 . A copy would be sent to the Social Security Administration. They would report the federal income tax withholding and FICA and pay the required FUTA and their portion of social security and Medicare ($901) with their Form 1040, reflected on Schedule H. The state income tax and unemployment tax withholdings would be remitted as required by the state authorities. In addition, the Boyds would be liable for $490 of state unemployment tax, which would also be remitted as required, but not later than the due date for filing the Boyds’ Form 1040. The employer is responsible for FUTA, which in this case would be $42 ($7,000 × 6.0%, less the 5.4% maximum credit).
The Boyds will have to either increase the withholding from their wages or increase their estimated tax payments by $2,433 in order to pay their household employee’s federal taxes during the course of the year (total earnings of $11,800 × the total of employee and employer portions of social security [12.4%] and Medicare tax [2.9%] of 15.3%, plus $586 federal income tax, plus the net FUTA tax of $42).
Table 41.4
Employee’s Name: Emily Whitney Employee’s Social Security Number 111-22-3333
Cash Paid Directly to Employee Noncash Amount Total Earnings for W-2 Purposes Social Security and Medicare Tax Deducted Federal Income Tax Deducted State Income Tax Deducted State Unemployment Taxes Deducted
January $850 $850 $65 $37 $43 $17
February $850 $850 $65 $37 $43 $17
March $1,050 $1,050 $80 $45 $53 $21
April $850 $850 $65 $37 $43 $17
May $850 $850 $65 $37 $43 $17
June $1,050 $300 $1,350 $103 $85 $68 $27
July $850 $850 $65 $37 $43 $17
August $1,050 $1,050 $80 $45 $53 $7
September $850 $850 $65 $37 $43
October $850 $850 $65 $37 $43
November $1,050 $1,050 $80 $45 $53
December $1,350 $1,350 $103 $107 $68
TOTAL $11,500 $300 $11,800 $901 $586 $596 $140
Forms you will need. You will need the following federal tax forms if you employ household help:
Schedule H, Household Employment Taxes
Form W-2, Wage and Tax Statement
Form W-3, Transmittal of Wage and Tax Statements
Form W-4, Employee’s Withholding Allowance Certificate
You will need to contact your state tax authorities for applicable state tax forms.
As an employer, you must keep records of any cash or noncash wages paid to your employee as well as any taxes withheld from those wages. Table 41.4 is designed to help you accumulate this information. You will need this information at year-end to prepare the employee’s Form W-2, which must be given to the employee by January 31 of the following year. Even if you are preparing only one Form W-2, you also will need Form W-3, Transmittal of Wage and Tax Statements , to send copies to the Social Security Administration. The government copies must be sent by the last day of February of the following year.
TAXORGANIZER
Records you should keep
Employee’s name and social security number exactly as it appears on the SSN card
Employer identification number from the IRS
Records of payments made to domestic help
Copies of payroll tax forms (W-2, W-3, etc.) filed for domestic helpchapter 41, we are still waiting for the IRS to issue draft 2017 Schedule H. We include this as a filled-out example for the Paul Boyd example. Last year, the IRS issued draft Schedule H on July 5, 2016. We will send the filled-in draft 2017 Schedule H once the IRS posts the draft form."?>
