All about the tax responsibilities of household employers

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Household employers

Are you and your spouse both working professionals and have dependents back home? By dependents, we mean your old age parents or children who need some support during the day in your absence.

It is a general trend in the U.S. that working professionals hire individuals like babysitters, caretakers, health aides, nannies, private nurses and au pairs to take care of their dependents. But, as their employers, are you taking care of the tax responsibilities of these household employees?

If not, then this article will help you understand the tax implications and responsibilities you need to carry out for your household employees and stay well versed with the current tax codes.

Social Security and Medicare Taxes 

Social Security and Medicare Taxes are a common phenomenon in the U.S. Be it a business person or an employee; all taxpayers are bound to pay these taxes to the IRS. These taxes are commonly known as FICA. 

In the case of household professionals, Social Security and Medicare Taxes come to the picture if you pay more than $2100 to any one of your household employees. Under the FICA, both the employer and employee are liable to pay 7.65% of paid wages to the IRS. This 7.65% breaks up like 6.2% of Social Security taxes and 1.4% of the Medicare taxes. Usually, employers withhold the amount of employee contribution of the FICA taxes from their employee’s paycheck.

You need not withhold such amount or pay FICA taxes on wages you pay to your spouse, a child under the age of 21, a parent or an employee who is under 18 years of age. Of course, this stays valid only if the household work is not their principal occupation. In any case, such household employees need to report compensation earned from their work using the Form W-2 (Wage and Tax Statement). 

You can also withhold an additional Medicare tax of 0.9% if you pay wages higher than $200,000 to a household employee. 

Federal Income Tax Withholding

As a household employer, you are not required to withhold federal income tax from your employee’s paycheck. But this stays situational, and you can withhold such amount of Federal Income Tax from their paycheck if they request you and you agree to the same. In this case, your employee would need to fill the Form W-4 (Employees’ Withholding Allowance Certificate) and submit it to you.

As an employer, you shall encourage your household employees to use the Tax Withholding Estimator available on the IRS website to ascertain the right amount of withholding from their paychecks. The estimator stays automatically connected to the Form W-4 which your employees can then fill and submit for your tax records.

If you are a household employer who withholds and pays the Social Security and Medicare taxes or withhold federal income tax from your employee’s paycheck, then you would need to complete the Form W-2 for each of such employees. Along with this, you are also required to fill the Form W-3 (Transmittal of Wage and Tax Statement)

Federal Unemployment Tax Act (FUTA)

If you pay cash wages to your household employees totalling more than $1,000 in a calendar quarter during the current or preceding calendar year, then you would have to pay FUTA taxes on the first $7,000 paid as a wage to each of your household employees. In this case, as well, you can avoid counting the wages paid to your spouse or a child under the age of 21 years. 

Good news is that you can claim a credit against the FUTA tax liability for the amount you pay into state unemployment funds. Also, if you pay wages as per the unemployment compensation law of a credit reduction state, then also you may have a reduced FUTA tax credit. 

Reporting household employee tax information

Being a household employer, you are subject to FICA tax, FUTA tax. In some cases, you might also be withholding federal income tax from your employee’s paycheck. In all of these conditions, you must ensure to file the following forms: –

  1. Schedule H (Form 1040)
  2. Household Employment Taxes

But, if you are a sole proprietor, then the forms you need to fill change as follows: –

  1. Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return and, 
  2. Form 941, Employer’s QUARTERLY Federal Tax Return, or 
  3. Form 944, Employer’s ANNUAL Federal Tax Return, or 
  4. Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees

If you plan on filing Schedule H with the Form 1040, then you can avoid owing additional taxes. This is possible only if you had already paid enough taxes before you filed to cover both employment taxes for your household employee and their income tax.

You can do this by making estimated tax payments to the IRS during the year using Form 1040-ES, Estimated Tax for Individuals. Also, those of you who are employed as household help can ask their employer to withhold more federal income tax from their wages during the year to cover both employment taxes for their household employee and their income tax liability. 

A point to keep in mind is that if you fail to pay household employment taxes during the year, then you may be charged an estimated tax underpayment penalty.

Hiring au pairs

The tax implications of au pairs totally differ from what we have discussed above. Since au pairs are always admitted into the U.S. using a J-1 Visa, they need to apply for a U.S. Social Security Number (SSN). Also, the stipend paid to au pairs constitute wages because of the existence of the employer-employee relationship and also requires them to file U.S. individual income tax returns. 

Good news is that au pair wages are not subject to Social security or Medicare Taxes because of their J-1 non-immigrant and non-resident alien status. But the au pair might be considered a resident alien if they have been to the U.S. previously as a teacher, student, trainee, or researcher in F, J, M, and Q non-immigrant status. In this situation, you as the host family, must withhold Social Security and Medicare taxes and pay federal unemployment taxes. 

Child and dependent care credit

You can reduce the amount of your federal income tax by claiming the Credit for Child and Dependent Care. You would be eligible for the same if you pay wages to someone to take care of your child or a dependent. 

Conclusion

It is quite evident that working professionals need an extra hand to take care of their dependents. Hiring household employees is an excellent way to manage both home and work, in a balanced manner. But, being a household employer bestows you with some extra tax responsibilities that you need to see to. Some of such tax codes might also enable you to claim a credit on your own federal income tax returns. As the MyTaxFiler team always promotes, being aware of the various tax codes and laws can prove to be really beneficial and earn you attractive tax benefits. If you still have something to discuss, then feel free to contact your MyTaxFiler expert today. 

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