If you have a household employee, you may need to pay state and federal employment taxes. Which forms do you need to file for your household employees? Is your maid, housekeeper, or babysitter covered by the rules? This Financial Guide provides the answers to these and other questions.
Table of Contents
This Financial Guide will help you decide whether you have a "household employee," as defined by the IRS, and, if you do, whether you need to pay federal employment taxes. It explains the rules for determining, paying, and reporting Social Security tax, Medicare tax, federal unemployment tax, federal income tax withholding, and state unemployment tax for your household employee. It also explains what records you need to keep. In addition, it provides you with the information you need to find out whether you need to pay state unemployment tax for your household employee.
While many people disregard the need to pay taxes on household employees, they do so at the risk of stiff tax penalties. As you will see below, these rules are quite complex and professional tax guidance is highly recommended.
A basic familiarity with these rules will make it easier to work with your tax advisor, saving you time, reducing tax costs, and avoiding tax penalties and interest charges.
Who is a Household Employee?
The "nanny tax" rules apply to you only if (1) you pay someone for household work and (2) that worker is your employee.
How Do You Verify That an Employee Can Legally Work in the United States?
It is unlawful for you to knowingly hire or continue to employ a person who cannot legally work in the United States.
When you hire a household employee to work for you on a regular basis, he or she must complete USCIS Form I-9 Employment Eligibility Verification. It is your responsibility to verify that the employee is either a U.S. citizen or an alien who can legally work and then complete the employer part of the form. Keep the completed form for your records. Do not return the form to the U.S. Citizenship and Immigration Services (USCIS).
Two copies of Form I-9 are contained in the UCIS Employer Handbook. Visit the USCIS website or call 800-767-1833 to order the handbook, additional copies of the form, or to get more information.
Do You Need to Pay Employment Taxes?
If you have a household employee, you may need to withhold and pay Social Security and Medicare taxes, or you may need to pay federal unemployment tax, or you may need to do both. To find out, read the table below.
You do not need to withhold federal income tax from your household employee's wages. But if your employee asks you to withhold it, you can choose to do so.
State Unemployment Taxes
To find out whether you need to pay state unemployment tax for your household employee contact your state unemployment tax agency. You'll also need to determine whether you need to pay or collect other state employment taxes or carry workers' compensation insurance.
Social Security and Medicare Taxes
Both you and your household employee may owe social security and Medicare taxes. Your share is 7.65% (6.2% for social security tax and 1.45% for Medicare tax) of the employee's social security and Medicare wages. Your employee's share is 6.2% for social security tax and 1.45% for Medicare tax for wages below the Additional Medicare Tax threshold (see above).
You are responsible for payment of your employee's share of the taxes as well as your own. You can either withhold your employee's share from the employee's wages or pay it from your own funds.
Social Security and Medicare Wages
You figure Social Security and Medicare taxes on the Social Security and Medicare wages you pay your employee. If you pay your household employee cash wages of $1,900 or more in 2015, all cash wages you pay to that employee in 2015 (regardless of when the wages were earned) up to $118,500 are social security wages and all cash wages are Medicare wages. However, any non-cash wages (food, lodging, clothing, and other non-cash items) you pay do not count as social security and Medicare wages. If you pay the employee less than $1,900 in cash wages in 2015, none of the wages you pay the employee are Social Security and Medicare wages, and neither you nor your employee will owe Social Security or Medicare tax.
Wages Not Counted
Do not count wages you pay to any of the following individuals as Social Security and Medicare wages:
Also, if your employee's Social Security and Medicare wages reach $118,500 in 2015, do not count any wages you pay that employee during the rest of the year as Social Security wages to figure Social Security tax. (But continue to count the employee's cash wages as Medicare wages to figure Medicare tax.)
You figure federal income tax withholding on both cash and non-cash wages (based on their value). However, do not count as wages any of the following items:
Withholding the Employee's Share
You should withhold the employee's share of Social Security and Medicare taxes if you expect to pay your household employee Social Security and Medicare wages of $1,900 or more in 2015. However, if you prefer to pay the employee's share yourself; see "Not Withholding the Employee's Share" in the next section.
You may withhold the employee's share of the taxes even if you are not sure your employee's Social Security and Medicare wages will be $1,900 or more in 2015. If you withhold the taxes but then actually pay the employee less than $1,900 in Social Security and Medicare wages for the year, you should repay the employee.
You pay withheld taxes as part of your regular income tax obligation. You don't deposit them periodically-subject to an exception for business owners. See "Payment Options for Business Employers" below.
Withhold 7.65% (6.2% for Social Security tax and 1.45% for Medicare tax) from each payment of Social Security and Medicare wages. Wages exceeding the $200,000 (single filer) threshold amount are subject to the additional Medicare tax or 0.9%. Instead of paying this amount to your employee, you will pay it to the IRS 7.65% for your share of the taxes. Do not withhold any social security tax after your employee's social security wages for the year reach $118,500 (2015).
If you make an error by withholding too little, you should withhold additional taxes from a later payment. If you withhold too much, you should repay the employee.
Not Withholding the Employee's Share
If you prefer to pay your employee's Social Security and Medicare taxes from your own funds, you do not have to withhold them from your employee's wages. The Social Security and Medicare taxes you pay to cover your employee's share must be included in the employee's wages for income tax purposes. However, they are not counted as Social Security and Medicare wages or as federal unemployment (FUTA) wages.
Federal Unemployment (FUTA) Tax
The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. Like most employers, you may owe both the federal unemployment tax (the FUTA tax) and a state unemployment tax. Or, you may owe only the FUTA tax or only the state unemployment tax. To find out whether you will owe state unemployment tax, contact your state's unemployment tax agency. See the list of state unemployment agencies at the end of this Guide for the address.
The FUTA tax is 6.0% of your employee's FUTA wages. However, you may be able to take a credit of up to 5.4% against the FUTA tax, resulting in a net tax rate of 0.6%. Your credit for 2015 is limited unless you pay all the required contributions for 2015 to your state unemployment fund by April 15, 2015. The credit you can take for any contributions for 2015 that you pay after April 15, 2015, is limited to 90% of the credit that would have been allowable if the contributions were paid by April 15, 2015.
You figure the FUTA tax on the FUTA wages you pay. If you pay cash wages to all of your household employees totaling $1,000 or more in any calendar quarter of 2014 or 2015, the first $7,000 of cash wages you pay to each household employee in 2015 is FUTA wages. (A calendar quarter is January through March, April through June, July through September, or October through December.) If your employee's cash wages reach $7,000 during the year, do not figure the FUTA tax on any wages you pay that employee during the rest of the year. For a discussion of "cash wages," see the section on Social Security Wages, above.
If you pay less than $1,000 cash wages in each calendar quarter of 2015, but you had a household employee in 2014, the cash wages you pay in 2014 may still be FUTA wages. They are FUTA wages if the cash wages you paid to household employees in any calendar quarter of 2014 totaled $1,000 or more.
Do not count wages you pay to any of the following individuals as FUTA wages:
Do You Need to Withhold Federal Income Tax?
You are not required to withhold federal income tax from wages you pay a household employee. You should withhold federal income tax only if your household employee asks you to withhold it and you agree. The employee must give you a completed Form W-4, Employee's Withholding Allowance Certificate.
If you agree to withhold federal income tax, you are responsible for paying it to the IRS.
You figure federal income tax withholding on both cash and non-cash wages you pay. Measure wages you pay in any form other than cash by the value of the non-cash item.
Do not count as wages any of the following items:
Paying Tax without Withholding
Any income tax you pay for your employee without withholding it from the employee's wages must be included in the employee's wages for federal income tax purposes. It is also counted as Social Security and Medicare wages and as federal unemployment (FUTA) wages.
How Do You Handle the Earned Income Credit (EIC)?
Certain workers can take the earned income tax credit (EIC) on their federal income tax return. This credit reduces their tax or allows them to receive a payment from the IRS if they do not owe tax. You may have to make advance payments of part of your household employee's EIC along with the employee's wages. You also may have to give your employee a notice about the EIC.
Notice about the EIC
The employee's copy (Copy B) of the IRS 2013 Form W-2, Wage and Tax Statement has a statement about the EIC on the back.
Otherwise, you must give your household employee a notice about the EIC only if you agree to withhold federal income tax from the employee's wages but the income tax withholding tables show that no tax should be withheld. Even if not required, you are encouraged to give the employee a notice about the EIC if his or her 2014 wages are less than the amount shown in the instructions to 2015 Form W-5.
If you do not give your employee Copy B of the IRS Form W-2, your notice about the EIC can be any of the following:
If you give your employee a substitute Form W-2 on time which lacks the required EIC information, you must give notice about the 2015 EIC to the employee within one week of the date you gave him or her the substitute Form W-2. If Form W-2 is required, but not given on time, you must give the employee notice about 2015 EIC by January 31, 2015. If Form W-2 is not required, you must give your notice to the employee by February 2, 2015.
How do You Make Tax Payments?
When you file your 2015 federal income tax return in 2016, attach Schedule H, Household Employment Taxes. Use this Schedule, discussed further below, to figure your household employment taxes. You will add the federal employment taxes on the wages you pay to your household employee in 2015, less any advance earned income credit payments you make to the employee, to your income tax. The amount you owe with your return is due to the IRS by April 18, 2016.
Asking for More Federal Income Tax Withholding
If you are employed and want more federal income tax withheld from your wages to cover the employment taxes for your household employee, give your employer a new Form W-4, Employee's Withholding Allowance Certificate. Complete it as before, but show the additional amount you want withheld from each paycheck on line 6.
If you get a pension or annuity and want more federal income tax withheld to cover the employment taxes for your household employee, give the payer a new Form W-4P, Withholding Certificate for Pension or Annuity Payments (or a similar form provided by the payer). Complete it as before, but show the additional amount you want withheld from each benefit payment on line 3.
Paying Estimated Tax
If you want to make estimated tax payments to cover the employment taxes for your household employee, get Form 1040-ES, Estimated Tax for Individuals. Use its payment vouchers to make your payments. You can pay all of the employment taxes at once or in installments. If you have already made estimated tax payments for 2015, you can increase your remaining payments to cover the employment taxes. Estimated tax payments for 2015 are ordinarily due April 15, June 15, September 15, 2015 and January 15, 2016.
Payment Option for Business Employers
If you own a business as a sole proprietor or your home is on a farm operated for profit, you can choose either of two ways to pay the 2015 federal employment taxes for your household employee. You can pay them with your federal income tax as described above, or you can include them with your federal employment tax deposits or other payments for your business or farm employees.
If you pay the employment taxes for your household employee with business or farm employment taxes, you must report them with those taxes on Form 941 or Form 943 and on Form 940 (or 940-EZ).
What Forms Must You File?
You must file certain forms to report your household employee's wages and the federal employment taxes for the employee if you pay the employee:
The employment tax forms and instructions you need for 2015 will be sent to you automatically in January 2016 if you reported employment taxes for 2014 on Schedule H (Form 1040), Household Employment Taxes.
Employer Identification Number (EIN)
You must include your employer identification number (EIN) on the forms you file for your household employee. An EIN is a 9-digit number issued by the IRS--not the same as a Social Security number.
A separate 2015 Form W-2, Wage and Tax Statement, must be filed for each household employee to whom you pay:
You must complete Form W-2 and give Copies B, C, and 2 to your employee by February 2, 2015. You must send Copy A of Form W-2 with Form W-3, Transmittal of Wage and Tax Statements, to the Social Security Administration by March 2, 2015 (March 31, 2015, if you file your Form W-2 electronically).
Use Schedule H (Form 1040), Household Employment Taxes, to report the federal employment taxes for your household employee if you pay the employee:
File Schedule H with your 2015 federal income tax return by April 18, 2016. If you get an extension to file your return, the extension will also apply to your Schedule H.
If you are not required to file a 2015 tax return, you must file Schedule H by itself. See the Schedule H instructions for details.
Business Employment Tax Returns
Do not use Schedule H (Form 1040) if you choose to pay the employment taxes for your household employee with business or farm employment taxes. Instead, include the Social Security, Medicare, and withheld federal income taxes for the employee on the Forms 941, Employer's Quarterly Federal Tax Return, that you file for your business or on the Form 943, Employer's Annual Tax Return for Agricultural Employees, that you file for your farm. Include the FUTA tax for the employee on your Form 940 (or 940-EZ), Employer's Annual Federal Unemployment (FUTA) Tax Return.
If you report the employment taxes for your household employee on Form 941 or Form 943, file Form W-2 for the employee with the Forms W-2 and Form W-3 for your business or farm employees.
What Records Must You Keep?
Keep your copies of Schedule H or other employment tax forms you file and related Forms W-2, W-3, W-4, and W-5. You must also keep records to consulting the information you enter on the forms you file. If you are required to file Form W-2, you will need to keep a record of your employee's name, address, and Social Security number.
Wage and Tax Records
On each payday you should record the date and amounts of:
Employee's Social Security Number
You must keep a record of your employee's name and Social Security number exactly as they appear on his or her Social Security card if you pay the employee:
You must ask for your employee's Social Security number no later than the first day on which you pay the wages. You may wish to ask for it when you hire your employee.
An employee who does not have a Social Security number must apply for one on Form SS-5, Application for a Social Security Card. An employee who has lost his or her Social Security card or whose name is not correctly shown on the card should apply for a new card. Employees may get Form SS-5 from any Social Security Administration office or by calling l-800-772-1213.
How Long To Keep Records
Keep your employment tax records for at least four years after the due date of the return on which you report the taxes or the date the taxes were paid, whichever is later.
State Unemployment Tax Agencies
District of Columbia
Household Employers Checklist
You may need to do the following things when you have a household employee: When you hire a household employee:
When you pay your household employee:
By February 2, 2015:
By March 2, 2015:
By April 15, 2015:
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