Many families have built themselves a home team. Their players include nannies, housekeepers, cooks, gardeners, or healthcare workers, and they often come with tax obligations with which the families must follow to comply with IRS requirements.
Not everyone who works at someone’s home is considered a household employee for tax purposes. To understand if an employer will get “hit” with a tax bill, the employer should evaluate each worker and then classify that worker as either an employee or an independent contractor. Note: Independent contractors are responsible for their own employment taxes, while household employers and employees share the responsibility.
Workers are generally considered employees if the employer controls what they do and how they do it. It makes no difference whether they work full-time or part-time, or whether they are paid a salary or an hourly wage.
IRS household employee tax obligations for qualified employees may include Social Security, Medicare, unemployment, and federal and state income taxes.
To determine who will get “hit” with tax obligations, an employer should make a distinction between the household’s employees and its independent contractors.
Determining Social Security and Medicare Tax Responsibilities
If a household player’s cash wages exceed the domestic employee coverage threshold of $2,000 in 2017, then the employer must pay Social Security and Medicare taxes — 15.3% of wages, which can either be paid entirely by the employer or split with the player. (If the employer and the player share the expense, then the employer is required to withhold the player’s share.)
Wages that are not taxable include those paid to:
- your spouse,
- your children under age 21
- your parents (with some exceptions), and
- household workers under age 18 (unless providing household services is the minor’s principal occupation).
The domestic employee coverage threshold is adjusted annually for inflation. There is also a wage limit on Social Security tax ($127,200 for 2017, adjusted annually for inflation).
Social Security and Medicare taxes apply only to cash wages, which do not include the value of food, clothing, lodging, and other noncash benefits that household employees receive. Employers can also exclude reimbursements for certain parking or commuting costs.
One way to provide a valuable benefit to household workers while minimizing employment taxes is to provide them with health insurance.
Sliding into First…SAFE!
Additional Household Employee Tax Requirements
Employers have a variety of additional tax and legal obligations they must follow to be safe from IRS penalties. Such duties include obtaining a federal Employer Identification Number (EIN) and having each household employee complete Forms W-4 (for withholding) and Form I-9 (which documents eligibility to work in the United States).
After year-end, employers must file Form W-2 for each household employee to whom they paid more than $2,000 in Social Security and Medicare wages or for whom they withheld federal income tax. Additionally, they must satisfy federal and state minimum wage and overtime regulations. Some states may require employers to provide workers’ compensation or disability coverage—as well as fulfill other tax, insurance, and reporting requirements.
Sitting on the Bench—YOU’RE OUT!
Unemployment and Federal Income Tax Liabilities
Just because an employer takes a player out of the game (or off the team) doesn’t mean that employer relinquished tax responsibilities for that player. An employer who pays total cash wages to household players of at least $1,000 in any calendar quarter must pay federal unemployment tax (FUTA). Wages paid to your spouses, your children under age 21, and your parents are excluded. The tax is 6% of the first $7,000 of annual cash wages paid to each household player. Although employers may also owe state unemployment contributions, they are entitled to a FUTA credit for those contributions (up to 5.4% of wages).
Employers are not required to withhold federal income tax — or, usually, state income tax — unless they agree to a player’s withholding request. In such cases, the employer must withhold federal income taxes on both cash and noncash wages except for:
- meals provided to employees for convenience,
- lodging provided in the employer’s home and as a condition of employment, and
- certain reimbursed commuting and parking costs (including transit passes, tokens, fare cards, qualifying vanpool transportation, and qualified parking at/near the workplace).
Let CRI Help You Stay in the Game and Hit a Home Run
While having a household employee can make family life easier, it can also complicate your tax return. CRI’s tax professionals can help ensure that you are following the rules of the game and hitting home runs with tax law compliance. Please contact us so that we can help you fulfill your tax obligations to your household employees.