Household Employee Tax

Many clients employ individuals to help maintain their homes or to help with childcare. The Internal Revenue Service refers to the taxes that the employer must pay for an individual that works in a client’s home as the “Nanny Tax”. There are specific guidelines to determine who is subject to this tax. The primary criteria for the employer to be subject to the Nanny tax, is if the employer controls the work and how it’s gets done. Individuals who control their work and provide their own tools and supplies are typically self-employed. That likely means that the Nanny tax does not apply to lawn services or various contractors who do work in your home.


If a household employee earns $2,600 or more per year, you need to pay both Medicare tax and Social Security tax, collectively known as FICA. Typically, half of these taxes are paid by the employer and half are withheld from employee wages, but employers have the option of paying both portions.


Employers are also be responsible for federal unemployment tax (FUTA) if paying a household employee $1,000 or more in any quarter. State unemployment taxes will likely be required as well.


The IRS generally doesn’t require withholding of federal income tax from a household employee’s wages unless the employee requests. Although, not required, it is always a good idea for employers to have household employees complete a federal and state Form W-4, Employee’s Withholding form. These forms are used to determine the amount of federal and state income tax to withhold.


Many clients say that their household employee prefers to be paid in cash, and thus they prefer not to report these wages and be burdened with the administration of payroll reporting. We recommend against this approach. There are countless cases of the employer’s saying they were doing what the household employee asked. However, if the relationship ends badly, if employee’s health suffers, or employee becomes eligible for social security, the employee could apply for unemployment or social security age or disability benefits. The employee may have maintained records to support their household wages for the years they were paid, and IRS will look to the employer for back taxes, penalties, and interest.


Contact us if you would like to discuss your particular situation with us, please give us a call or shoot us an email.

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