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Dealing with Household Employees

Parents of young children often hire helpers, especially if both spouses work. You might need someone to watch the children and do various household chores, including cooking and cleaning. When your children are old enough to care for themselves and perhaps do some of those tasks, your need for household help may end—but not forever. As you go through life, you might have to hire people to care for an elderly family member or one whose health is failing.

Payments and paperwork
Household workers, of course, must be paid. If those payments reach certain threshold levels, you must file tax forms and comply with applicable tax laws, as described in the following examples. You’ll have to obtain an employer identification number and pay employment taxes.

Example 1: Adam and Nicole Benson hire a nanny for their two children. Because they pay her more than the $1,800 threshold in 2012, the Bensons must withhold and pay both Social Security and Medicare tax. Typically, those taxes total 15.3% of a household employee’s wages, but the total is only 13.3% of wages in 2012.

Example 2: Jay Martin’s wife, Helen, comes home from the hospital after a serious accident. The Martins hire a home aide to help Helen recover. During the fourth quarter of 2012, because the Martins pay the aide more than the $1,000 threshold in a calendar quarter, they must pay federal unemployment tax: 0.6% of a household employee’s wages on wages up to $7,000 per year.

These two examples are not mutually exclusive. If the Bensons pay their nanny over $1,000 in any quarter this year, they also must pay federal unemployment tax. Similarly, if the Martins pay the home aide over $1,800 in 2012, they also must withhold Social Security and Medicare taxes. Moreover, whenever you hire a household employee to work for you on a regular basis, you and the employee must complete the U.S. Citizenship and Immigration Services (USCIS) Form I-9, “Employment Eligibility Verification.”

There are some exceptions to these rules. For instance, you won’t owe these payroll taxes if you hire your own child and if the child is under age 21. In addition, state taxes also may be a concern.

Over (not under) the table The official rules, as spelled out in the previous paragraphs, may run into human obstacles. Many household workers prefer to be paid in cash, off the books. They might report little, if any, income and, thus, avoid paying income as well as payroll tax. You, as a household employer, may be tempted to go along, saving the employer’s share of payroll tax and cutting down on the paperwork burden.

If you avoid your responsibilities as a household employer, though, you are breaking federal and state laws. What’s more, you may be leaving yourself open to severe financial consequences.

Example 3: Mary Edwards hired a nurse to care for her ailing husband. The nurse worked for Mary for many years under the radar. Mary never complied with any of the requirements described in this article. Years later, the nurse applied for Social Security and Medicare benefits, listing her years in the Edwards household as part of her work record. Mary eventually had to pay huge amounts of back payroll tax plus interest and penalties. There is no time limit on the ability of the IRS to demand unpaid payroll tax if the employer does not file an employment tax return.

Additionally, the money you spend on household employees may qualify for tax benefits, such as medical deductions and the child and dependent care credit. However, if you claim such deductions and credits, a subsequent audit of your income tax return might reveal a failure to file required returns and pay the tax relating to hiring household employees. Again, the total amount you could owe, counting interest and penalties, could be enormous.

Savvy solutions
If you hire household employees, you’re required to comply with all the rules and pay the appropriate taxes. Instead of coping with all the forms yourself, you can seek expert assistance.

One approach is to deal with an agency when you need a housekeeper, home aide, etc. The people who will come to your home will be employees of the agency; the agency will bear all of the employer responsibilities, so you won’t have to do so. You will have to pay the agency fees, though, and that can be expensive.

Another tactic is to call in a company that specializes in payroll reporting and recordkeeping. A payroll service company can help you deal with all the paperwork in order to help ensure that you comply with IRS regulations and pay your household employees’ appropriate federal and state tax requirements. Moreover, our office can help you deal with the tax filing requirements.