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Household help could mean more tax work for employers

April 7 is National No Housework Day. I didn't realize that until #TaxTwitter pal Joe Kristan noted it at the end of his Eide Bailly LLP tax roundup blog post today.

In my defense, I overlooked No Housework Day because that's basically every day for me. Oh, I do some household chores, but grudgingly. And I'm lucky. The hubby is a more diligent cleaner than I.

That means we don't (so far) have a paid housekeeper. But some folks do. And depending on the arrangement, those who hire household help have some tax tasks to deal with every year.

Not just maids: The first thing to note is that the folks who come to dust, vacuum and otherwise clean your various residential rooms are just one type of household help as far as the Internal Revenue Service is concerned.

The IRS says that for tax purposes, household employees include housekeepers, maids, babysitters, gardeners and others who work in or around your private residence as your employee. A fuller list is found in IRS Publication 926, aka the Household Employer's Tax Guide.  

The key phrase here is "as your employee."

Your tax requirements as the hirer of household help depends on whether the assistance is provided by an independent contractor or as your employee. The short answer to this distinction is that workers, household and otherwise, are your employees if you can control not only the work they do, but also how they do it.

My earlier post on this topic elaborates on the IRS rules about distinguishing between an employee and contractor.

If you are indeed the boss of your household worker, then get ready for those aforementioned added tax duties.

FICA requirements: The Federal Insurance Contributions Act, or FICA, requires that both employers and employees pay Social Security and Medicare taxes.

The FICA tax total is 15.3 percent of wages, split evenly between the boss and worker. But the employer generally is required to withhold the employee's share of FICA tax from the worker's wages.

When it comes to household workers, if you pay cash wages (IRS speak for payments made by check, money order, etc.) of $2,300 or more for 2021 (this threshold is subject to annual inflation adjustments) to any one household employee, you generally must withhold 6.2 percent for Social Security and 1.45 percent for Medicare (for a total of 7.65 percent) from all cash wages you pay to that employee.

Or, if you're a generous employer, you can pay your household help's FICA taxes yourself.

Remember, though, that you also must pay your 7.65 percent share as employer for that worker's FICA taxes.

Additional FICA considerations: If you pay your employee's share of Social Security and Medicare taxes from your own funds, that's a nice way to give your worker some added cash flow flexibility.

However, those amounts count as the employee's wages for the worker's income tax purposes. You might want to make that clear to your employee so that he or she isn't surprised at his/her taxable wages at tax return filing time.

For your employer purposes, however, the FICA amounts you cover for your worker do not count as wages when it comes to paying federal unemployment tax. More on this tax in a minute.

Also, don't withhold or pay Social Security and Medicare taxes from wages you pay to the following family members:

  • Your spouse,
  • Your child who is under age 21, or
  • Your parent, unless an exception is met.

You also don't have to withhold FICA for an employee who is younger than 18 at any time during the year, unless household work is that young person's principal occupation. If the employee is a student, providing household work isn't considered to be his or her principal occupation.

Federal income tax withholding: While FICA withholding is required in most household help situations, you as the employer are not required to withhold federal income tax from wages you pay to a household employee.

However, if your employee asks you to withhold federal income tax and you agree, there is tax paperwork.

You must get a completed Form W-4, Employee's Withholding Certificate (which now, by virtue of this mention, is added to Tax Forms Fiesta! blog page) from your household worker.

W-4 form 2020 finalized 122019_W4
IRS Publication 15-T, Federal Income Tax Withholding Methods has the applicable tax withholding tables, which are updated each year.

Form W-2, Wage and Tax Statement: If you must withhold and pay Social Security and Medicare taxes, or if you withhold federal income tax, for your household employees, then you'll also have to complete a Form W-2, Wage and Tax Statement (already on the ol' blog's forms page), for that worker.

And you'll have to let the Social Security Administration know by sending in Form W-3, Transmittal of Wage and Tax Statement. IRS Publication 926 has more information on when and where to furnish and file these forms in its "What Forms Must You File?" section.

W-3 form

Note, too, that if you're filling out a W-2 for a worker (or more), you'll need your own employer identification number (EIN), as well as your employees' Social Security numbers. If you don't already have an EIN, the quickest way to get one is by using the IRS online EIN application.

Federal Unemployment Tax Act (FUTA): Remember that reference earlier to unemployment tax? Here's the promised (threatened) additional info.

If you paid a household employee wages totaling more than $1,000 in any calendar quarter during the calendar year or the prior year, you generally must pay federal unemployment tax (FUTA) tax on the first $7,000 of earnings.

Again, payments to family members get different treatment. Don't count wages paid to your spouse, your child who is under the age of 21, or your parent. Also, don't consider the amounts you pay to these individuals as wages subject to FUTA tax.

Generally, you also can take a credit against your FUTA tax liability for amounts you paid into state unemployment funds.

Schedule H, Household Employment Taxes: When tax return filing time arrives, you'll also have to submit another form is you paid a household worker wages subject to FICA or FUTA taxes or if you withhold federal income tax from that employee's earnings.

Schedule H, Household Employment Taxes (yes, a new Tax Forms Fiesta! document), is filed along with your individual income tax return.

Schedule H Form 1040 attachment

If you're not required to file a return, you must still file Schedule H separately to report household employment taxes.

Nanny tax matters: Although this post is about household help in general, it often is referred to as the nanny tax since so many working couples or single parents find that they need the added child care assistance.

Nanny taxes get a lot of attention when they trip of folks who are appointed to high-level government jobs. It's amazing how often this happens, especially to presidential cabinet nominees.

But hiring a nanny also can provide a couple of tax breaks, according to Guy Maddalone, founder and CEO of GTM Payroll Services.

Payments to a nanny can count toward the Child and Dependent Care Tax Credit, which was enhanced as part of COVID-19 pandemic relief measures included in the recently enacted American Rescue Plan Act (ARPA). The credit now is up to $8,000 for eligible families with one child and as much as $16,000 for two or more children.

Or, notes Maddalone in a recent article in for Accounting Today, if you have a workplace dependent care flexible spending account (FSA), your nanny's wages are a reimbursable expense from that account.

Get help for your household help tax tasks: OK, you're glad you have household help, but the tax implications are creating a whole new set of problems.

In that case, consider hiring a firm like Maddalone's that provides payroll, tax, insurance and compliance services for families with household employees. Or hire a tax professional with experience in this specialized tax area.

As you've already figured out by hiring household help, it's worthwhile, both from peace of mind and financial perspectives, to get professional assistance.

You also might find these items of interest:

 

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