If you hire someone to do household work and that person is considered your employee, you may be liable for paying employer related taxes. Although it is commonly called the “Nanny Tax” it covers more than just nannies, it includes workers who perform household work, which the IRS defines as “work done in or around your home”. This definition captures babysitters, yard workers, drivers, private nurses, private cooks, etc.
Your first task is to determine if the person you hired is your employee or is self-employed. The worker is your employee if you control what work is done and how it is done. The household worker may have been sent to you by an agency but if you control what work is done and how it is done the worker is still considered your employee. Whether the worker is part-time or full-time or is paid daily, weekly, hourly or for each job is not relevant once the worker is determined to be your employee. If you need assistance with your particular circumstances, an Enrolled Agent or other tax professional may be able to assist you.
Once you have determined whether you have a household employee, your next task is to determine whether you need to pay employment taxes. For 2013 the rule is:
• If you pay cash wages of $1,800 or more to any one household employee then you need to withhold and pay social security and Medicare taxes. You are allowed to pay the employees portion as well as the employer’s portion without withholding from the employee, but you are responsible for paying both employees’ and employer’s portion.
o Wages paid to your spouse, your child under the age of 21, your parent (with certain exceptions), an employee under the age of 18 (with certain exceptions) are not included.
• If you pay total cash wages of $1,000 or more in any calendar quarter of 2012 or 2013 to household employees, then you need to pay Federal Unemployment Tax (FUTA). You may also owe state unemployment tax (SUTA).
o Wages paid to your spouse, your child under age 21, or your parent is excluded.
o The portion of each employees’ wage in excess of $7,000 is not charged FUTA.
Although you may not need to pay federal employment taxes, you may still be liable for state employment taxes.
Federal Income tax withholding
You are not required to withhold federal income tax from your household employees’ wages, but if agree to do so, your employee must provide a completed W4 and you are responsible for making the payments. If you pay income taxes for your employee without withholding it, it must be included in the employees’ wages for federal income tax, Medicare, social security and federal unemployment tax purposes.
Other things to consider
“You may be subject to the estimated tax underpayment penalty if you did not pay enough income and household employment taxes during the year.” (IRS 2013).
You will also need to provide a W2 for each employee and you may also need to give an Earned Income Credit (EIC) notice either as part of the W2 or as a separate notice.
An Enrolled Agent or other tax professional can provide assistance for your particular circumstances.
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