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Household Employees

If you hire someone to do household work you may have what the IRS refers to as a household employee.  A key issue is whether the worker is actually your employee or a self-employed contractor.  Per the IRS, "The worker is your employee if you can control not only what work is done, but how it is done."  Another point is whether the worker offers their services to the general public.  For example, a landscaping company mowing your lawn is not your employee but a full time nanny is.

Some examples of household work include:

  1. Babysitter/nanny
  2. House keeper
  3. Driver
  4. Maid
  5. Private nurse
  6. Yard worker

If the worker qualifies as your employee and you pay them over $2,000 throughout the year you need to pay employment taxes such as social security and Medicare.  Social security and Medicare both have an employee and an employer component totaling 15.3% – 7.65% from the employee and 7.65% from the employer.  If you pay wages of more than $1,000 in any calendar quarter you also need to pay federal unemployment tax.  The federal unemployment tax rate is 6% of the first $7,000 of wages but depending on your state’s laws you may also be subject to state unemployment tax, which can reduce the federal rate.  In our home state of Minnesota state unemployment insurance for household employees is required.  It can range from 1.59% to 8.44% of the first $31,000 of wages.  The good news is that paying MN unemployment will reduce the federal rate to 0.6%, so the most you will pay into federal unemployment is $42.

In addition to paying the employment taxes there are other tasks that need to be completed when you are a household employer.

  • You must obtain an employer identification number from the IRS – this can be your social security number.
  • You must issue your employee(s) W-2 Wage and Tax statements by January 31 of the following year. The W-2(s) must also be filed with the Social Security Administration and likely with your home state.
  • When you file your individual income tax return you will document your household employee(s) on Schedule H.

You are not required to deposit the employment taxes throughout the year but the balance is due when you file your individual income tax return.  The additional balance due may cause you to be subject to estimated tax penalties if you do not have enough withheld or pay enough in quarterly estimates.

Most payroll processing companies offer a reduced fee arrangement for household employees.  If you utilize one of these services you may only need to submit wages.  All the filings and tax deposits are completed for you.  They also will prepare a Schedule H that you can provide to your tax preparer or use when preparing your own taxes.

This can seem like an issue that is subject to a lot of nuances.  A quick discussion with your tax advisor should answer your questions and make this seem less daunting.

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