Household employees like nannies, housekeepers and landscapers make our busy lives easier, but paying them comes with tax and additional obligations that can’t be ignored. Failure to comply can lead to IRS audits and penalties, among other problems. To avoid trouble, you need to understand who is and isn’t a household employee, decide how you’re going to pay them and get a good understanding of your tax responsibilities. Speak with a financial advisor to learn whether you have any household employees and your obligations toward them.
Defining Household Employees
A household employee is someone you hire to provide domestic services in your home. You control both what work is done and how it’s done. It doesn’t matter whether they work part-time or full-time or are hired directly by you or through an agency. They are still your household employees for tax and legal purposes. Common household employees include nannies, housekeepers, caregivers, gardeners, private nurses and drivers.
Independent contractors control how the work is done and supply their own tools and are not generally considered household employees. Independent contractors typically include plumbers, electricians and other repair people who offer services to the public.
Some other specific workers also generally won’t qualify as household employees. These workers include your spouse, your child under 21, your parent and any worker under 18. But there are exceptions. For instance, if an under-18 person works as your nanny as their principal occupation, they may be considered your household employee.
Hiring a household employee activates several significant concerns for you, the employer. For instance, if the employee requests it, you will have to withhold payroll taxes and make estimated payments to the tax authorities.
Taxes aren’t the only concern. In addition, household employees are protected by the Fair Labor Standards Act (FLSA). That means household employers must pay at least the federal minimum wage currently set at $7.25 per hour, pay overtime after 40 hours per week and keep accurate time and pay records, among other responsibilities.
Paying Household Employees
Like other workers, household employees expect financial compensation for their efforts. You have several options for paying household employees:
Do it yourself: To handle payroll yourself you need to get an Employer Identification Number (EIN) from the IRS. The task involves tracking hours, calculating wages, withholding taxes and filing paperwork. This can be time-consuming and complex, especially if you have multiple employees.
Payroll service: Payroll providers can simplify payroll by automatically calculating taxes, filing forms and paying your share of taxes. Some specialize in household payrolls. Services typically cost $40-$100 per month per employee.
Temp agency: Hiring household help through an agency means the agency handles payroll, taxes and compliance. You pay the agency, who pays the worker. This shifts the tax burden but may cost more.
Regardless of how you pay, household employees must complete tax forms like W-4 and I-9. As the employer, you need an EIN and may have to pay employer taxes like Social Security and Medicare as well as federal unemployment tax and sometimes more if wages exceed IRS thresholds.
Household employees can make running a household easier, but they come with significant obligations as well. As a household employer, you must comply with IRS requirements or risk penalties for any of the following violations:
- Not paying or withholding required taxes
- Misclassifying employees as contractors
- Paying employees under the table in cash without reporting it
The consequences of failing to follow household employer rules can be substantial. They may include owing back taxes as well as interest and penalties.
Staying compliant, on the other hand, comes with sizable benefits. For the employer, a major benefit consists in avoiding an audit. Taxes paid also count toward certain credits and deductions you can use on your return. Employees win by getting access to unemployment insurance coverage, a work history and paying into Social Security so they are eligible for disability and retirement benefits.
Household Employee Example
If you pay a nanny $30,000 per year, you must track hours and wages and adhere to the requirements of the Fair Standards Labor Act. You’ll also have to withhold taxes, if the nanny requests it and provide a W-2 showing $30,000 in wages. Here’s how the taxes would break out:
- Withhold 7.65% or $2,295 as the employee’s share of Social Security and Medicare taxes
- Pay another 7.65% or $2,295 as the employer’s share of Social Security and Medicare taxes
- Pay $420, equal to 6% on the first $7,000 in wages, for federal unemployment taxes
In this example, the total household employment taxes come to $5,010. You would report this as part of your tax return on Schedule H with your Form 1040.
Paying household employees like nannies, housekeepers and others requires tracking hours, withholding taxes, filing forms and meeting IRS requirements. While complicated, failing to comply with these requirements can lead to audits, taxes owed and financial penalties for the employer and problems down the road for the employee. A payroll service or temp agency can alleviate much of the paperwork burden, at some added cost compared to doing it yourself.
Tips for Paying Employees
- Discuss your household employee situation with a financial advisor to develop a payroll strategy that meets IRS regulations. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s Paycheck Calculator to figure federal, state and local taxes and come up with a take-home pay figure.
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