Household Employee Tax Considerations

Many people are unclear whether the people working in their homes should be considered household employees for tax purposes. For example: if you have a nanny and a landscaper working at your home, would one or both be considered a household employee by the IRS? And why should it matter?

A worker is deemed to be a household employee if they perform services in and around your home and you control not only what work is done, but also how it is done. It doesn’t matter whether you pay them hourly, daily, weekly or by the job. It also doesn’t matter if their schedule is full-time or part-time, or if you hire them from an agency, an association or on your own.

You Have Tax Responsibilities for Household Employees

The distinction of a household employee is important because you as their employer are required to withhold Social Security and Medicare taxes on wages paid to your household employee if you pay $2,200 or more in wages in 2020 (adjusted annually). The Social Security tax rate is 6.2% for the employee and the employer and the wage base limit is $137,700 (adjusted annually). The Medicare tax rate is 1.45% for the employee and employer, and there is no wage base limit.

The IRS requires household employees to pay federal income tax on the wages they earn by working in your home. Although you are not required to withhold federal income tax from wages paid, if your employee requests that you withhold it, then you should comply. The employee will need to complete Form W-4 to specify the amount to be withheld.

In addition, you must pay federal unemployment taxes and state unemployment taxes as an employer. You are not required to withhold state income taxes, but your employee may request that you do so and you should do so. You also may be required to withhold local income taxes, depending on the city in which you live.

Likely Household Employee Roles

In the example noted above, it’s likely that the nanny would be considered a household employee if you control what work is done, how it is done and you pay them directly. If you occasionally hire the landscaper and they operate as an independent contractor or business owner, they are not considered a household employee.

The most common examples of household employees include:

• Housekeepers and house cleaners
• Maids and domestic workers
• Health aides and private nurses
• Nannies and babysitters
• Cooks, chefs, and butlers
• Groundskeepers and caretakers
• Chauffeurs and drivers

Workers who are self-employed and can control how the work is done are not considered to be your employees. They generally supply their own tools and offer services to the general public.

Examples include:

• Independent contractors
• Carpenters and builders
• Electricians
• Plumbers
• Repair people

Often, homeowners obtain household services through an agency and pay the agency, which then pays the worker. The IRS does not consider these workers as household employees as they exist on the agency’s payroll.

Meeting Your Tax Responsibilities for Household Employees

The IRS provides information on your tax responsibilities for household employees at irs.gov. To properly meet tax and reporting requirements, you first will need to obtain an Employer Identification Number (EIN) to file Schedule H, Household Employment Taxes with the IRS. The application form can be found on the IRS website at irs.gov/EIN or by faxing or mailing Form SS-4 to the IRS.

Your household employee will need to complete Form I-9 (Employment Eligibility Verification) which verifies their identity and confirms that they are legally eligible to work in the U.S. You also will need to obtain a state unemployment insurance account number. The process varies from state to state, so check with your state offices to see which department issues it. As an employer, you will be required to submit state quarterly unemployment tax filings as well as file quarterly for withheld state and local income tax payments, if applicable.

Annually, you should provide Form W-2 to each household employee by January 31, for the prior tax year. A copy of Form W-2 also should be sent to the Social Security Administration. You will need to complete Schedule H when you file your individual tax return for the year. If you don’t file a return, you still must file Schedule H as it is used to calculate and report how much tax you paid for your employees.

If all of this sounds much more burdensome than you anticipated, don’t be alarmed – your accountant can ease the tax reporting burden. Some payroll services may be able to handle the administrative aspects but check first, as not all services handle household employees.

If you have any questions about this, please contact your ALL tax advisor or call us at 617-738-5200.