Household Employment Taxes
Have you hired someone to perform duties in and around your home? Perhaps you have hired a nanny, housekeeper, personal assistant, chef or estate manager? If yes, the IRS has determined they become a household employer. By law, these individuals cannot be classified as independent contractors. Hiring a nanny means you are legally required to pay employment taxes and follow federal and state labor laws. If the household employee earns more than $2000.00 in a calendar year (2017), the household employer is required to withhold and remit payroll taxes to the IRS and the state. NW Nannies LLC has taken the stress of the household employment obligations by partnering with HomePay, the nation’s most respected household employment payroll & tax specialist. Their comprehensive, guaranteed service handles all your “nanny tax” obligations, including:
- Register for federal and state tax accounts
- Complete and file New Hire Report
- Calculate the correct amount of federal and state taxes to withhold each pay period
- Track gross pay, net pay, and taxes withheld, and federal and state employer taxes
- Prepare state tax returns and remit taxes quarterly and remit both employer and employee taxes
- Prepare federal tax estimates four times per year and remit both the employer and employee taxes
- Prepare year-end tax forms (W-2’s, W-3, Schedule H and State Annual Reconciliation)
- Respond to IRS and state requests/inquiries
- Monitor ever-changing household employment tax law
Free Phone Orientation
NW Nannies has arranged for you to receive a complimentary phone orientation with HomePay at your convenience. You don’t need an appointment. Just call 1-888-273-3356 and a HomePay expert will evaluate your individual situation, run payroll & budget scenarios, help you capitalize on tax breaks and answer any questions.
We encourage you to take advantage of this valuable guidance. Whether you use HomePay’s comprehensive service or not, we have found that this quick phone call helps families avoid tax and legal mistakes that can be expensive and time consuming.
IMPORTANT NOTE FOR EMPLOYERS OF TEMPORARY NANNIES: If you pay any single individual less than $2,000 (2017) in a calendar year, you are exempt from some of the nanny tax obligations listed above. However, you are still legally considered a household employer and, therefore, must meet all applicable labor laws.
The Value of Paying Legally
What are the financial and legal responsibilities for household employers? One of the important discussions we have with clients is whether they have considered about how they will handle payroll for their new nanny. The law basically states: When a family hires someone to work in their home, they become a household employer.
As an employer, the household is required by law:
- To pay federal and state employer taxes, including Social Security, Medicare, Federal and Oregon unemployment insurance. These are requirements of the family, and they differ from the requirements the household employee has.
- To withhold certain taxes from the employee’s wages, and report and remit those amounts to the IRS and Oregon (or other state) tax authorities. These amounts include the employee’s share of Social Security and Medicare. In addition, as an employer you have the option to withhold state and federal income tax on behalf of the employee.
- To determine if you want to carry workers’ compensation insurance. This is NOT a requirement in Oregon but it is a requirement in Washington and most other states. Workers’ compensation insurance is meant to provide certain coverage if an employee has a work-related injury. Workers’ compensation for household employees may already be covered under the homeowner’s policy, or can usually be available as a relatively low-cost rider.
There are several reasons we recommend paying a household employee on the books:
- Tax Breaks for the Employer: Household employers are entitled to certain tax breaks if their employee is paid legally. If you have access to a Flexible Spending Account (or Dependent Care Account) through your own employer, you may use those pre-tax contributions to pay your own household employee’s wages. If you do not have access to your own FSA, then you may claim the Tax Credit for Child or Dependent Care on your personal income tax return at the end of the year. The after-tax benefits to you of these breaks can cover all or most of the additional costs otherwise associated with paying an employee “on the books.” Check with your tax adviser for specifics.
- Disability, Unemployment and other Benefits: Depending on the state, if a household employee suffers a non-work related injury that prevents them from working, the employee may be eligible to receive financial assistance. (Work related injuries would be covered by workers’ compensation insurance.). If a household employee loses their job through no fault of their own, they are entitled to receive approximately 50% of their salary for up to six months. Employees paid legally will receive retirement benefits and basic medical coverage through Social Security and Medicare contributions.
- Employment History: Employees with reported incomes will be establishing an employment history, which is critical to qualify for things like car loans, home loans, student loans, credit cards, future job applications, etc.
- Peace of Mind: Families who pay legally do not have to worry about legal disputes levied by unhappy former employees, IRS audits or charges of committing tax evasion. The IRS has been aggressively auditing household employers who pay illegally. Failure to meet these tax obligations is considered tax evasion and can result in expensive back taxes, penalties and interest.
- Respecting the Professional: Paying your household employee legally demonstrates to him/her you value them as a professional and not just a “babysitter”. Not only will you being doing a good thing for your employee, your willingness to provide professional compensation will likely create a better, longer-lasting employment relationship.
- Publication 926 – The Household Employer’s Tax Guide – https://www.irs.gov/uac/about-publication-926
- W-4 – Helps you calculate how much federal income tax to withhold – https://www.irs.gov/uac/about-form-w4
- Schedule H — Tax form used to report your federal nanny taxes – https://www.irs.gov/uac/about-schedule-h-form-1040
Nanny Tax Calculator – http://www.myhomepay.com/Resources/Nanny-Tax-Calculator
“I have found the nannies from NW Nannies to be experienced, competent, and reliable. They care for all ages, from young infants to older children. They are indispensable for the new mom!”Kerry