When you hire someone to work in your home, you may actually be hiring household employees and also be inadvertently qualifying yourself as an employer. When it comes to employment taxes, becoming an employer comes with various and specific obligations. With a staff in your employ, you may have to contend with issues such as withholding and paying Social Security and Medicare (FICA) taxes. You may even be obligated to pick up the tab for federal and state unemployment insurance. Before you hire anyone to work for you inside your home, here are some things you’ll want to be aware of.
Who Qualifies as Household Employees?
Household employees are defined as those whom you hire to care for family members living in your home, clean your house, prepare your meals, maintain your yard, or provide similar domestic services. Not everyone who works in your home will be considered a household employee, however.
Some workers you’ll retain are classified as independent contractors. These self-employed individuals typically provide their own tools, set their own hours, offer their services to other customers, submit invoices, and are responsible for their own taxes.
To avoid the risk of misclassifying employees, however, it can be helpful to err on the side of caution and assume that all workers in your employ qualify as household employees.
Owing Employment Taxes
As of 2018, for any person to whom you pay $2,100 or more annually to complete work around your house, you’re required to fulfill certain state and federal tax obligations. (This threshold is adjusted annually to account for inflation.)
In addition, you’re required to pay the employer’s half of FICA (Social Security and Medicare) taxes (7.65% of cash wages) and to withhold the employee’s half. For household employees who earn $1,000 or more in a calendar quarter, you must also pay federal unemployment taxes (FUTA)
equal to 6% of the first $7,000 in cash wages. Depending on your resident state, you may also be required to make state unemployment contributions, though you’ll receive a FUTA credit for those contributions, up to 5.4%.
You don’t have to withhold federal (and, in most cases, state) income taxes, unless you and your employees agree to a withholding arrangement. Regardless of whether you withhold income taxes, however, you’re required to report employees’ wages on Form W-2.
A Few Exceptions
You aren’t required to pay employment taxes on wages you pay to your spouse, your child under age 21, your parent (unless an exception is met), or an employee who is under age 18 at any time during the year, provided that performing household work isn’t the employee’s principal occupation. If the employee is a student, providing household work isn’t considered his or her principal occupation.
Additionally, depending on your state and the number of hours your household employees work, you may be required to have workers compensation and liability insurance.
Making Tax Payments
Any federal employment taxes and withholding taxes you owe should be documented by attaching Schedule H to your Form 1040. You may have to pay state taxes separately and more frequently (usually quarterly). Bear in mind that this may increase your own tax liability at filing, though the Schedule H tax may not be subject to estimated tax underpayment penalties, under certain circumstances.
If you owe FICA or FUTA taxes or if you withhold income tax from your employee’s wages, you will also need an employer identification number (EIN).
There’s no statute of limitations on the failure to report and remit federal payroll taxes. You can be audited by the IRS at any time and be required to pay back taxes, penalties, and interest charges.
If you are interested to learn whether or not you may be considered an employer who may incur tax consequences, please complete the form below to discuss your household employee situation with an Untracht Early advisor.