There’s no doubt that hiring someone to regularly clean your home, care for your children or an aging parent, or maintain your yard has the potential to help your life run more smoothly. But to ensure things continue to run without a hitch, you need to stay on top of the relevant tax and reporting obligations — some of which can become quite involved. Here are a few highlights of the basic tax-related responsibilities associated with household help.
What are the basics?
In general, if you pay a household worker at least $2,000 in 2017, you also must pay Social Security taxes of 6.2% on cash wages of up to $127,200 (in 2017), 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 noncash 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.
Here’s an example: You agree to pay your employee $100 each pay period and cover his or her share of Medicare and Social Security taxes. For income tax purposes, you’ll record compensation of $107.65 per period. For Medicare and Social Security, the wages are reported at $100 per period.
If you pay an employee $1,000 in any calendar quarter, you also may owe federal unemployment (FUTA) tax. This is 6% of the employee’s cash wages — up to $7,000 each year — though this amount may be offset by a credit. Some states also impose their own unemployment tax.
What about recordkeeping?
You’ll need to record the names, addresses, Social Security numbers, and cash and noncash 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’ll need to obtain an Employer Identification Number, or EIN.
By January 31 of each year, you’ll need to provide your employees with copies B, C and 2 of IRS Form W-2 (“Wage and Tax Statement”) for the previous year. You must send copy A of the W-2 to the Social Security Administration.
When you file your income tax return, you’ll complete and attach 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.
What are the exceptions?
These tax and reporting obligations don’t apply in the following situations, even if the employee’s annual wages total more than $2,000:
- 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, or
- 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.
Who can help?
Complying with these regulations helps your employee build an employment record and gain access to Social Security, Medicare and other benefits. It also can ensure that legal and financial problems related to hiring household help are kept to a minimum — thus assisting you both in the long run. Your tax advisor can provide additional information on handling these obligations.