If you have household help, you probably have tax obligations
If you directly employ a nanny, housekeeper, cook, gardener, health care assistant or other employee in your home, it’s critical that you stay on top of your tax obligations (commonly referred to as the “nanny tax”). Here’s a quick overview of what household help employers need to withhold and
file with the IRS.
Nuts and Bolts
Specific tax obligations vary depending on the type of tax. For example, you aren’t required to withhold federal income taxes (or state income taxes in most cases) from a household employee’s pay, unless the employee asks you to withhold and you agree. In that case, have the employee complete
Form W-4 and then withhold income taxes on both cash and noncash wages (other than certain meals and lodging).
With FICA (payroll) taxes, withhold amounts for Social Security and Medicare if your household employee’s cash wages reach a specified threshold ($2,400 for 2022). If you meet the threshold, pay the employer’s share of Social Security taxes (6.2%) and Medicare taxes (1.45%) on the cash wages, but not on meals, lodging or other noncash wages. In addition, withhold the employee’s share of these taxes (also 6.2% and 1.45%), although you may opt to pay the employee’s share rather than withholding it from his or her pay. Note: You may need to withhold additional Medicare tax if you pay an employee more than $200,000 in a calendar year.
There’s no FICA tax liability for wages you pay to certain family members or to household employees under the age of 18 if working for you isn’t their principal occupation. A student who babysits on the side would be one example.
Additionally, you must pay federal unemployment tax (FUTA) if you pay total cash wages to household employees (other than certain family members) of $1,000 or more in any quarter in the current or preceding calendar year. A 6% tax rate applies to the first $7,000 of an employee’s cash wages, although credits for state taxes reduce that rate to 0.6% in most cases. Ask your tax advisor about possible state tax responsibilities.
Using Schedule H
Unlike businesses, you generally don’t need to file quarterly employment tax returns for household employees. Instead, report household employment taxes on Schedule H of your personal income tax return. But if you own a business as a sole proprietor, you may add the taxes for household employees to the deposits or payments you make for your business employees and include household employees on certain IRS forms, such as Forms 940 and 941.
Even if you report household employment taxes on Schedule H, you may want to pay the tax throughout the year, either via quarterly estimated tax payments or by increasing withholding from your wages. Otherwise, you’ll have to pay the tax when you file your return and may be subject to penalties for underpayment of estimated tax. Also, file Form W-2 if you’re required to withhold FICA taxes or have agreed to withhold income taxes for a household employee.
Your Lenox Advisor Can Help
People working in your home aren’t necessarily household employees. You generally aren’t required to withhold or pay taxes for independent contractors such as occasional babysitters who work for many different families. However, the rules for distinguishing between employees and contractors are complicated. Also, employers can be subject to additional obligations that include complying with minimum wage and overtime requirements, and documenting immigration status. Your tax advisor can help you with these issues.