Posted by Tucker Accounting Services LLC

Essential Things Everyone Should Know about Household Employee Taxes

Essential Things Everyone Should Know about Household Employee Taxes

A household employment tax allows everyone that hires a nanny or a gardener, to name a few, and pays them above $2,200 every year, to pay household employee taxes for their worker. The tax is the employer's share of the Medicare and Social Security taxes, commonly called federal unemployment tax.

In a bid to take care of inflation, Uncle Sam raises the total payment level every year. 


Who is an Employee?

The IRS defines a household employee as anyone hired for domestic work in your private residence. You are in complete control of the scope of work and method of accomplishment. The arrangement can be full or part-time, and the mode of hiring the worker does not matter. 

A babysitter is classified as an employee who will be subjected to the $42,200 threshold provided you pay them and direct them on how you want them to take care of your kid. Also, they come to your house to do all of their assignments and not a special daycare facility. Other examples of household workers are:

  • Caretakers

  • Butlers

  • Babysitters

  • Chauffeurs

  • Cooks

  • Yard workers

  • House cleaners

  • Housekeepers

  • Nannies

  • Private nurses

Services that are not of a household nature, like a secretary, does not fit this category. Also, minors below age 18 are not classified as employees if they are in school. They are classified as students. 


Cases When an Employee Cannot be Classified as one

One of the factors that determine whether the employee will be classified as an independent contractor is the level of control that the employer has over the job. According to Uncle Sam, a self-employed person has total control over the work done, which relieves the employer of the obligation to pay the necessary tax.

Self-employed people offer their services to the public with the use of their tools and equipment. They do not have a single client or customer. For instance, you might hire a pool care business to help maintain your pool. The business owner comes to your house with their tools and probably has workers; hence such a business type is a typical self-employed business. 


How to handle Household Employment Taxes 

As long as you pay an employee $2,200 per year, your tax withholding obligation is the same with any business. This value should, however, rise a little for the coming year to take care of inflation. 

Your employees must fill Form W-4, and it is your responsibility to withhold taxes, file Schedule H alongside the federal income tax return, and make available pay stubs. 


Setting Up Payroll and Taxes 

The frequency with which you will pay your worker depends on you. It could be weekly or biweekly. You can make use of payroll accounting software, which will immensely help you. Paystub issues could come through the direct deposit method. 

You must withhold and send the Medicare and Social Security tax from your worker's pay. The value of these taxes is set at 15.3% of the combined wages paid. However, only wages that are up to $137,700 will have to pay Social security tax in 2020. This threshold has shot up to $142,800. The payment of both the employer and worker is 7.65% each.

Some employers choose to pay the full 15.3% without removing any tax from their worker's pay. 

Also, employers need to pay the federal unemployment tax (FUTA) set at 6% on the first 7000 USD you paid in a year to the worker. There might be a credit of 5.4% if you pay the state unemployment tax as well. 

At the end of every year, you should hand a Form W2 to your employee, which has all the annual taxes and wages you withhold. The employer will file their Form 1040 alongside Schedule H, which will shed light on the annual payroll taxes. There is also the opportunity to pay the household employment tax quarterly with form 1040 ES.

It is a good idea to get help from an accountant to help you with the payroll intricacies and prepare the tax filing.


Benefit for the Employee 

 workers to have a work history. With this, they qualify for benefits like Medicare, Social Security, and unemployment compensation should they be laid off. 

Some states give their domestic worker's disability insurance if they can't work because of illness or injury.


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