You hear about it every election year, some woman is running for office and she gets outed for not paying her “nanny tax.” (I’m sure that there are men guilty of this crime as well, but it seems that women candidates are the ones who get caught.) If you have household employees, such as a nanny, private nurse, cleaning person, health aide or private gardener, you may be subject to paying their payroll taxes.
How do I know I have an employee? Good question – that’s how people get in trouble. Here’s an example: I hire Ernie the lawn guy. He uses his own equipment. He usually comes on Thursdays, but last week he thought my grass wasn’t long enough so he didn’t cut it. Ernie basically has control over what he does. Ernie has his own lawn care company – he’s self employed. On the other hand, I hired Dawn to help take care of my mom. Dawn only worked a few hours a week, but Dawn was supposed to come at a certain time, leave at a certain time, we purchased any supplies she needed, and she basically did what she was instructed to do. Dawn was really a household employee.
If you hire someone to care for your children in your home – that’s pretty much a household employee because you’re going to have some very specific rules about how your children are cared for. On the other hand, if you take your children to someone else’s home for child care, even though you may have very specific rules about how your child is cared for, it’s still not a household employee because your child is being cared for outside of the home. Is this getting any easier? I know it’s kind of fuzzy but that’s pretty much how it goes.
If you have a household employee, you need to have them do employee paperwork: They need to fill out an I-9 form. Here’s the link to that: http://www.uscis.gov/files/form/i-9.pdf. The page that needs to be filled out is on page 4. For most people, you’re going to want to check their driver’s license and social security card to make sure they are allowed to work in the US. Page 5 gives you lists of other acceptable documents should you need them.
The other document that you’re going to want your employee to complete is a W4 if you’ll be withholding income tax. http://www.irs.gov/pub/irs-pdf/fw4.pdf Most household employers do not withhold state or federal income tax but some do. You will be withholding social security and medicare taxes from every paycheck though.
So now that you’ve determined that you’ve got a household employee and you’re withholding social security and medicare taxes, how do you pay them? Household employee withholding is a little easier than if you own a business and have to pay withholding taxes. You’re actually going to pay the taxes with your own personal 1040 return on a form called Schedule H. http://www.irs.gov/pub/irs-pdf/f1040sh.pdf
Before you panic about having to do withholding and stuff, make sure that you’ve paid enough to be required to do withholding. If you pay any one employee wages of $1700 or more, then do the Schedule H. If you withheld federal income tax, that will be included on the Schedule H as well. Also, if you pay total cash wages of $1000 or more in any calendar quarter, then you’ll also have to do a schedule H. For example: you hired two workers around Christmas and paid them each $600 – then you’ve got to do the Schedule H, even though you haven’t paid either of them over the $1700 limit. There are some exceptions for people under 18, hiring your kids, or hiring your parents. If you think you have an exception to paying the nanny tax, or want more information, you can read more about it in IRS publication 926. http://www.irs.gov/pub/irs-pdf/p926.pdf
You will need to supply your household employee with a W2, and the appropriate copies will need to be sent to the Social Security Administration. You can get free forms from the IRS. You have a deadline of January 31st for getting the W2 to your employee and February 29th for the Social Security Administration. You must use the real form – it’s red. You can’t download it off the internet. Here are W2 filing instructions from the Social Security Administration: http://www.socialsecurity.gov/employer/index.htm
Now here’s the big commercial plug—doing all these forms can be a real pain in the behind for a normal person. For a tax geek like me, it’s kind of fun. (I guess that means I’m not normal?) But at Roberg Tax Solutions we can get all of your household employee tax paperwork taken care of and done right, so you don’t have to worry about it.