There are several reasons for hiring household help, including child or elder care or general cleaning and yard maintenance. However, when a person hires outside help, he or she becomes an employer. Thus, that person has specific tax obligations, such as withholding and paying Social Security and Medicare (FICA) taxes and possibly federal and state unemployment insurance. This article examines the tax-related responsibilities associated with hiring outside help.
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 (in 2018), as well as a Medicare tax of 1.45% on all cash wages. “Cash wages” refers to compensation paid by, for instance, check or money order — but doesn’t include the value of food, lodging or other non cash compensation.
You’re also responsible for submitting the employee’s share of Social Security (also 6.2%) and Medicare (also 1.45%) taxes. If you cover the employee’s share yourself (adding up to 7.65%), you’ll need to include that amount as wages for income tax purposes, but not for reporting Social Security and Medicare.
If you pay an employee $1,000 in any calendar quarter, you also may owe federal unemployment (FUTA) tax. This is 6% of the first $7,000 of cash wages per employee — up to $420 of tax each year — though this amount may be offset by a credit. Some states also impose their own unemployment tax.
Keep accurate records
You’ll need to record the names, addresses, Social Security numbers, and cash and non cash wages paid to household employees, as well as taxes withheld or paid, and retain this information for at least four years after the due date of the tax return on which the taxes were reported. In addition, you must obtain an Employer Identification Number, or EIN.
By January 31 of each year, you’ll need to provide your employees with IRS Form W-2 (“Wage and Tax Statement”) for the previous year. You also must file a copy with the Social Security Administration.
You’ll have to file Schedule H, “Household Employment Taxes.” After calculating the total amount of Social Security, Medicare, FUTA and withheld federal income tax, you’ll add this to your income tax liability for the year.
To avoid having to pay household employee taxes when you file your return, you can make estimated payments throughout the year. Or, if you’re employed, you can ask your employer to increase the amount of federal income tax withheld.
Exceptions to the rules
These tax and reporting obligations don’t apply in the following situations, even if the employee’s annual wages total more than $2,100:
- The employee is under age 18 (unless household employment is his or her primary occupation).
- The employee is your spouse.
- The employee is your child and under age 21.
- The employee is your parent — though some exceptions apply that might cause the wages to be included.
Using an independent contractor also can relieve you of some tax and reporting obligations — but the individual must be a bona fide independent contractor. The distinction between employee and contractor hinges on several factors, including how much control the worker has over the work done, and whether he or she offers services to the general public.
Turn to your adviser
If you’re considering hiring outside household help, it’s critical to understand your tax obligations. To avoid penalties due to missteps, consult with your tax adviser.
Ray joined Hancock & Dana in 2014. He specializes in representing individual and business clients with IRS issues including Audits, Notices, Collection, Employment Tax, Appeals, and Offer-In-Compromise. Ray joined Hancock & Dana after a 26-year career with the IRS as a Revenue Agent and manager. This background provides a unique understanding of how to resolve and prevent issues with the IRS.