When you hire a nanny, senior caregiver, housekeeper, or other domestic help, you’re an employer. You may not have an official ‘company,’ but the IRS is clear about tax paying and reporting for domestic employees to whom you pay over $1,900 in a calendar year. Make sure that your employer status isn’t an afterthought when preparing for your personal tax return; you’ll need the information for Schedule H. If you haven’t set systems in place, now is a good time to start. Here are 6 steps to IRS compliance:
- People who you hire to work in your home are classified by the IRS as non-exempt employees. This means that they are required to be paid overtime for hours that exceed 40 hours in a 7-day period. You can’t get around this by paying a salary, since salaries are for exempt employees. However, if the worker lives with you, then there are exceptions.
- You’ll need a Federal Employer Identification Number, and your employee’s social security number. Complete and file the Texas Employer New Hire Reporting Form within 20 days of hiring. (If you’re in another state, use your state form.)
- Obtain a Form W-4 from the employee to capture tax identification information. You aren’t required to withhold federal income tax, and it’s more work for you. However, if you don’t regularly withhold and pay federal income tax, the employee may have to pay an underpayment penalty if he or she doesn’t make quarterly tax payments.
- You’re required to withhold 6.2% for FICA (Social Security). Some household employers elect to pay the full 12.4% of Social Security taxes for domestic help. The same applies for the Medicare tax – 1.45% each for employee and employer (2.9% total).
- File quarterly state wage reports. (If you’re in Texas, see the Texas Employer’s Quarterly Wage Report Filing Options.) If you withhold federal income tax for your employee, it’s also a good idea to file Form 1040-ES quarterly. The taxes you owe for your household employee are attached to your personal tax liability.
- Annually, by the end of January, provide the employee with Form W-2, a record of annual wages. You’ll also file a copy of the Form W-2 and Form W-3 with the Social Security Administration by the end of February.
The above rules are for domestic workers hired directly. Hiring through an agency may cost a little more, but the labor burden falls on the agency, not on you. If you employ a nanny or caregiver, you can pay for many expenses including wages, taxes, and search fees through a Flexible Spending Account. If both spouses work, or at least one is searching for work, then you may qualify for the Child and Dependent Care Tax Credit. You can use up to $3,000 of these expenses per child (up to a maximum of $6,000 of qualified expenses) to calculate your child care tax credit. This tax credit was designed to help cover some the costs of day care, day camp, or other child care needed while you are at work. Either way, all accounting for domestic workers must be handled through a personal account. Nannies and other household workers are not qualified expenses for a business’ payroll.
If you need further information about nanny taxes or other tax related issues, please contact Jeff Bergman, CPA, Tax Manager, Salmon Sims Thomas & Associates.