Many families employ people to work in their homes, such as nannies, housekeepers, cooks, gardeners and health care workers. The employer’s tax obligations for such workers is commonly referred to as the “nanny tax.” This article looks at applicable taxes, such as Social Security, Medicare, unemployment and federal income.
Have a household employee? Be sure to follow the tax rules
Many families employ people to work in their homes, such as nannies, housekeepers, cooks, gardeners and health care workers. The employer’s tax obligations for such workers is commonly referred to as the “nanny tax.” If you employ a domestic worker, make sure you know the tax rules.
Not everyone who works at your home is considered a household employee for tax purposes. To understand your obligations, you must first determine whether your workers are employees or independent contractors. Independent contractors are responsible for their own employment taxes, while household employers and employees share the responsibility.
Workers are generally considered employees if you control what they do and how they do it. It makes no difference whether you employ them full time or part time, or pay them a salary or an hourly wage.
Social Security and Medicare taxes
If a household employee’s cash wages exceed the domestic employee coverage threshold of $2,000 in 2017, you must pay Social Security and Medicare taxes — 15.3% of wages, which you can either pay entirely or split with the employee. (If you and the employee share the expense, you must withhold his or her share.) But don’t count wages you pay to:
- Your spouse,
- Your children under age 21,
- Your parents (with some exceptions), and
- Household employees under age 18 (unless working for you is their principal occupation).
The $2,000 domestic employee coverage threshold is adjusted annually for inflation, and there’s a wage limit on Social Security tax that’s also adjusted annually for inflation ($127,200 for 2017).
Social Security and Medicare taxes apply only to cash wages, which don’t include the value of food, clothing, lodging and other noncash benefits you provide to household employees. You can also exclude reimbursements to employees for certain commuting costs.
Unemployment and federal income taxes
If you pay total cash wages to household employees of $1,000 or more in any calendar quarter in the current or preceding calendar year, you must pay federal unemployment tax (FUTA). Wages you pay to your spouse, children under age 21 and parents are excluded.
The tax is 6% of each household employee’s cash wages up to $7,000 per year. You may also owe state unemployment contributions, but you’re entitled to a FUTA credit for those contributions, up to 5.4% of wages.
You don’t have to withhold federal income tax — or, usually, state income tax — unless the employee requests it and you agree. In these instances, you must withhold federal income taxes on both cash and noncash wages, except:
- Meals you provide employees for your convenience,
- Lodging you provide in your home for your convenience and as a condition of employment, and
- Certain reimbursed commuting costs.
Excludible commuting costs include transit passes, tokens, fare cards, qualifying vanpool transportation and qualified parking at or near the workplace.
As an employer, you have a variety of tax and other legal obligations. This includes obtaining a federal Employer Identification Number (EIN) and having each household employee complete Forms W-4 (for withholding) and I-9 (which documents that he or she is eligible to work in the United States).
After year end, you must file Form W-2 for each household employee to whom you paid more than $2,000 in Social Security and Medicare wages or for whom you withheld federal income tax. And you must comply with federal and state minimum wage and overtime requirements. In some states, you may also have to provide workers’ compensation or disability coverage and fulfill other tax, insurance and reporting requirements.
Having a household employee can make family life easier. Unfortunately, it can also make your tax return a bit more complicated. Let us help you with the details.