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Household employees and employment taxes: Are you responsible?

Individuals 02.10.2020 3 MIN READ

If you employ a nanny, maid, cook, maintenance person or other household employee, you may be liable for paying and reporting payroll taxes. However, if these workers are the employee of an agency, or are an independent contractor, you are not responsible for paying or reporting taxes.

Knowing the tax rules for household employees can help you stay on the right side of the law. Let’s examine the situations where you are, or are not, liable for tax payments.

You ARE responsible if,

  1. You dictate how, where and when the work is done, the number of hours to be worked and the amount paid for the services rendered
  2. You provide the tools and equipment needed to perform the services 
  3. You can fire the household help

You’re NOT responsible if,

  1. The worker was hired through an agency, the agency determines who does the work and the amount paid to the worker for services rendered, and the agency is responsible for the quality of the work
  2. The household help is not hired through an agency and the worker: 
    1. provides his or her own tools and equipment needed to perform the services 
    2. provides similar services to other families
    3. hires and pays any assistants needed to perform the job

Tip: In the second scenario, it’s a good idea to sign an agreement with the worker confirming that they are an independent contractor responsible for their own tax payments. Include an outline of the services they provide you that are entirely within their control, thus making your tax liabilities completely clear.

Applicable employment taxes

If your worker or workers fit the first scenario, you may be liable to pay:

  • Social Security & Medicare (FICA taxes) 
  • Federal Unemployment Tax
  • State Unemployment Tax 
  • Federal Income Tax (on employees’ request)

For more information about employment taxes, see IRS Publication 926, Household Employer’s Tax Guide.

Tax filing requirements

You are not required to file separate employment tax returns for your household employees. Applicable federal employment taxes will be computed on the Form 1040 that you file as an employer. State unemployment tax filing requirements differ by state.

You need to provide employees who are subject to FICA or income taxes with a Form W-2 before January 31 of the calendar year for which wages are paid. This Form W-2 also needs to be filed with the IRS before February 28 of the calendar year for which wages are paid.

Penalties for non-payment or non-filing of employment taxes

If you happen to not pay or file taxes for eligible employees, you may be responsible to pay a part of the unpaid taxes out of your own pocket, with no reimbursement from your employee. The penalties imposed depend on whether the non-payment and non-filing are deemed to be due to an oversight or deliberate.

Honest mistakes result in penalties that are a percentage of the payable taxes and a relatively small amount as a fine. However, willful non-payment or non-filing can mean penalties equal to the full amount of unpaid taxes, plus additional fines and interest on the balance due. 

Next steps

Before hiring a household employee, be aware that there may be both federal and state tax ramifications. Beyond that, worker’s compensation insurance may be a requirement depending on the state in which you hire the worker. To make sure you’re completely covered, reach out to your Ayco advisor.

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