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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,
You’re NOT responsible if,
Applicable employment taxes
If your worker or workers fit the first scenario, you may be liable to pay:
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.
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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Updated for tax year 2022