Hiring household employees, such as nannies, housekeepers, or gardeners, comes with a set of responsibilities for the employer, particularly regarding taxes. Household employee taxes can be complex, involving federal, state, and sometimes local tax obligations.  I want to address some of the key aspects of household employee taxes, to help with the understanding of household employee taxes, including who qualifies as a household employee, the types of taxes involved, the process of withholding and paying these taxes, and relevant compliance issues.

I should note that in almost every IRS audit, the examiner or Revenue Agent will ask the taxpayer about househild employees.  There is a significant amount of non-compliance with reporting wages paid to household employees, and the IRS is well aware of that scenario.

Defining a Household Employee

A household employee is someone who is paid to provide services within a private home. Common examples include:

• Nannies or babysitters
• Housekeepers or maids
• Gardeners or landscapers
• Home health aides

The distinction between a household employee and an independent contractor is crucial. According to the IRS, a worker is considered a household employee if the employer can control not only what work is done but also how it is done. This control distinguishes household employees from independent contractors, who typically have more control over how they perform their work. 

Types of Taxes Involved

Employers of household employees are responsible for several types of taxes, including:

1. Social Security and Medicare Taxes (FICA): Employers must withhold and pay Social Security and Medicare taxes if they pay a household employee $2,400 or more in wages in 2023. Both the employer and the employee contribute to these taxes.

2. Federal Unemployment Tax Act (FUTA): Employers are required to pay FUTA tax if they pay total cash wages of $1,000 or more in any calendar quarter. FUTA tax is paid solely by the employer and is used to fund state unemployment programs.

3. State Employment Taxes: States may have their own unemployment insurance taxes, disability insurance taxes, and other employment-related taxes that employers must pay.

4. Income Tax Withholding: While employers are not required to withhold federal income tax from a household employee's wages, they may choose to do so if the employee requests it and the employer agrees. Employers may also need to comply with state income tax withholding requirements.

Withholding and Paying Taxes

The process of withholding and paying taxes for household employees involves several steps:

1. Obtaining an Employer Identification Number (EIN): Employers must obtain an EIN from the IRS to report and pay taxes.  This can be obtained online via the IRS website.

2. Form I-9: Employers must verify that the household employee is legally eligible to work in the United States by completing Form I-9, Employment Eligibility Verification. 

3. Form W-4: If the employer agrees to withhold federal income tax, the employee must complete Form W-4, Employee's Withholding Certificate.

4. Calculating Withholdings: Employers must calculate the correct amount of Social Security, Medicare, and federal income tax (if applicable) to withhold from the employee’s wages.

5. Paying Taxes: Employers can pay the withheld taxes along with their share of Social Security, Medicare, and FUTA taxes through the Electronic Federal Tax Payment System (EFTPS) or by mailing a check to the IRS.

6. Reporting Taxes: Employers must file Schedule H (Household Employment Taxes) with their federal income tax return. This form reports the Social Security, Medicare, FUTA, and withheld federal income taxes.

Compliance and Recordkeeping

Compliance with household employee tax regulations is critical. Employers should:

• Keep accurate records of wages paid and taxes withheld.
• Provide the employee with a Form W-2, Wage and Tax Statement, by January 31 of the following year. This form summarizes the employee's earnings and the taxes withheld.
• File a copy of Form W-2 with the Social Security Administration by the end of February.

Penalties for Non-Compliance

Failure to comply with household employee tax requirements can result in significant penalties. Employers may be subject to fines for not paying required taxes, failing to file required forms, or providing incorrect information. Additionally, the IRS may charge interest on any unpaid taxes.

Conclusion

Managing household employee taxes involves understanding the distinctions between employees and independent contractors, complying with federal and state tax laws, and ensuring proper withholding and reporting. By staying informed and organized, employers can fulfill their tax obligations and avoid potential penalties. As household employment continues to grow, awareness of these tax responsibilities becomes increasingly important for maintaining legal and financial compliance.  If you have a household employee, be sure to advise your tax return preparer so that information is properly reported.