What kinds of household workers are covered by nanny tax rules?
Household workers include anyone who does work in or around your home such as baby sitters, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers. In addition, the worker must be your employee, which means you can control not only what work is done, but how it is done.
It does not matter whether the work is full time or part time, or that you hired the worker through an agency. On the other hand, if only the worker can control how the work is done, the worker is not your employee, but is self-employed.
What must I do if I think my worker or worker-to-be isn't a U.S. citizen?
It is unlawful for you to knowingly hire or continue to employ an alien 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 the employee part of the Immigration and Naturalization Service (INS) Form I-9, Employment Eligibility Verification. You must verify that the employee is either a U.S. citizen or an alien who can legally work here and then complete the employer part of the form. Keep the completed form for your records.
What are my tax duties if I 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.
- If you pay cash wages of $1,800 or more in 2013 to any one household employee, withhold and pay Social Security and Medicare taxes.
- If you pay total cash wages of $1,000 or more in any calendar quarter of 2012 or 2013 to household employees, you must pay unemployment tax.
If I hire teenagers as babysitters or for yard work, must I withhold and pay tax for them?
When figuring whether you paid an employee $1,800 or more in 2013 to babysitters or others, you generally don't count wages paid to an employee who is under age 18 at any time during the year.
If the employee is a student, providing household services is not considered his or her principal occupation. However, you should count these wages if providing household services is the employee's principal occupation.
Are there ways to pay my household employee that minimize the employment tax?
Wages subject to employment tax do not include the value of food, lodging, clothing, and other non-cash items you give your household employee. However, cash you give your employee in place of these items is included in wages.
If you reimburse the amount your employee pays to commute to your home by public transit (bus, train, etc.), do not count the reimbursement (up to $240 per month in 2013) as wages.
Further, if you reimburse your employee for the cost of parking at or near a location from which your employee commutes to your home, do not count the reimbursement (up to $240 a month in 2013) as wages.
I'm not sure yet whether I'll pay enough this year to require withholding. What should I do?
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 $1,800 or more in 2013.
If you withhold the taxes but then actually pay the employee less than $1,800 in Social Security and Medicare wages for the year, you should repay the employee.
Okay, I've withheld tax on the employee and I owe the employer's share. How do I pay these amounts?
You pay withheld taxes as part of your regular income tax obligation. You don't deposit them periodically. 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.
Do I have to reduce the worker's take-home pay by the tax on that pay?
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.
In what cases do I owe unemployment 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. You may owe only the FUTA tax or only the state unemployment tax, or both. To find out whether you will owe state unemployment tax, contact your state's unemployment tax agency.
If you pay cash wages to household employees totaling $1,000 or more in any calendar quarter of 2013, the first $7,000 of cash wages you pay to each household employee in 2013 is FUTA wages. If you pay less than $1,000 cash wages in each calendar quarter of 2013, but you had a household employee in 2012, the cash wages you pay in 2013 may still be FUTA wages. They are FUTA wages if the cash wages you paid to household employees in any calendar quarter of 2012 totaled $1,000 or more.
Do not withhold the FUTA tax from your employee's wages. You must pay it from your own funds.
Do I 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 non-cash wages by the value of the non-cash item. Do not count as wages any of the following items:
- Meals provided at your home for your convenience.
- Lodging provided at your home for your convenience and as a condition of employment.
- Up to $240 a month in 2013 for bus or train tokens (passes) you give your employee, or in some cases for cash reimbursement you make for the amount your employee pays to commute to your home by public transit.
- Up to $240 a month in 2013 to reimburse your employee for the cost of parking at or near your home or at or near a location from which your employee commutes to your home.
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, Medicare and FUTA wages.
What about Earned Income Credit (EIC)? What must I do?
Certain workers can take the earned income 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 are encouraged to give the employee a notice about the EIC if his or her 2013 wages are less than the amount shown in the instructions to 2014 Form W-5.
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. If you give your employee that copy by January 31, 2014 (as discussed under Form W-2), you do not have to give the employee any other notice about the EIC.
What federal tax forms must I file if I have a household employee?
Form W-2 and Schedule H of Form 1040. Specifically:
A separate Form W-2, Wage and Tax Statement, must be filed for each household employee to whom you pay Social Security and Medicare wages, or wages from which you withhold federal income tax. Give Copies B, C, and 2 to your employee by January 31st and send Copy A of Form W-2 with Form W-3, Transmittal of Wage and Tax Statements, to the Social Security Administration by February 28th.
Use Schedule H (Form 1040), Household Employment Taxes, to report the federal employment taxes for your household employee if you pay the employee Social Security and Medicare wages, FUTA wages, or wages from which you withhold federal income tax.
- File Schedule H with your federal income tax return. If you are not required to file a tax return, file Schedule H by itself.