When it comes to working in someone’s home, working arrangements can often be casual and an employer may prefer to pay an employee’s wages in cash to avoid the effort of setting up a formal employment relationship and paying taxes. This grey area can lead to confusion for both parties, but determining if a household worker is considered an employee can lead to many benefits to the employer, as well as the employee. Most private employers hire through an employment agency that formalize your employment relationship, and utilize a payroll service company to handle paying an employee’s compensation, keeping track of financial documents and filing taxes on behalf of the employer. However, some employers wish to handle paying employees and filing taxes themselves. Here’s what you need to know if this is you:
Taxes For Household Employers
If a worker provides regular service within your home, whether it is childcare, cleaning, management or anything in-between, there’s a good chance they are considered an employee by the IRS. The IRS determines this status by the level of control and direction provided by the employer. As a result, both the employer and the employee have the responsibility of withholding and paying certain taxes. These taxes include federal and state income tax and FICA taxes for the employee, and FICA taxes as well as federal and state unemployment insurance by the employer. A household employee is responsible for paying the same taxes as if they worked for any other business and as such, are responsible completing a W-2. This W-2 is then use to prepare and file the employee’s tax return on Form 1040.
For 2023, FICA taxes are applicable if a family has paid at least $2,600 in the year and unemployment insurance taxes for wages of more than $1,000 in a calendar quarter. If a household employer has compensated an employee beyond these thresholds, they are considered an employer by the IRS and are responsible for paying and reporting employment taxes, including filing Schedule H with their federal tax return. There are two notable exceptions: if a worker is under the age of 18, or if they were placed by a childcare staffing agency, in which case they are an employee of another company.
Social Security & Medicare Taxes
During any calendar year in which an employer pays more than a specified amount ($2,600 in 2023), they must collect and pay the employer portion of Social Security and Medicare taxes on an employee’s behalf. The same is true if a household employer pays $1,000 or more during a calendar quarter. Employees are responsible for paying half of this tax (which an employer should withhold from their paycheck), and employers are responsible for the other half. Although rare, some employers choose to cover both portions and not withhold any of it from their employee’s pay.
Social Security Credits
In addition to paying Social Security and Medicare taxes, employers must also report wages to the Social Security Administration. To be eligible for Social Security, disability benefits, or Medicare benefits in the future, employees must earn eligibility credits during eligible working years. As a household employee, employees earn:
- One credit for every $1,640 made in 2023
- Up to four credits per year
Federal Unemployment Tax
If an employer pays an employee more than $1,000 in any quarter of the current year (or the previous year) to their household employees collectively, they are responsible for paying 6% Federal Unemployment Tax, or FUTA, on the first $7,000 in wages for each household employee. (Employees don’t pay this tax; an employer does.) If an employer also pays an employee’s state unemployment insurance taxes, Schedule H provides the employer credit and reduces the FUTA rate accordingly.
Federal Income Tax Withholding
The IRS requires household employees to pay income taxes throughout the year as compensation is earned, not just at the tax filing deadline. In most cases, employers do this by withholding money from an employee’s paycheck and send it to the IRS on their behalf, however there is no legal requirement for household employers to do so, so employees can wind up with an unexpected tax bill at the end of the year if they don’t ensure taxes are being withheld (or they don’t set aside money to pay these taxes). Employees without withheld income can make estimated quarterly tax payments if they would like to avoid an unexpected year-end tax bill.
Employer Contributions To Employee Health Care Coverage
Household employers can choose to contribute toward an employee’s health care coverage costs, contributing directly to their individual policy and avoiding paying taxes on their contribution. A household employer can also contribute to other health care coverage plans and arrangements for an employee’s benefit. Old State Staffing will discuss the specifics of these and other benefits that may be offered to employees during the hiring and placement process.
Are There Tax Credits For Household Employers?
Depending on an employee’s compensation, he or she may qualify for a tax credit for low-to-moderate-income workers, the Earned Income Credit (EIC). This credit can lower an employee’s taxes and may result in a refund. The EIC has specific qualifications and income limits, so you’ll have to do some research to see if you’re eligible or discuss this with an employment specialist.
Household/family-care employers may qualify for the Child and Dependent Care Credit. In 2023, this credit can reduce the cost of childcare expenses and can be worth as much as 20% to 35% of up to $3,000 of child care or similar costs for a child under 13, or up to $6,000 for two or more dependents. Since 2021, the American Rescue Plan has brought significant changes to the amount and way that the Child and Dependent Care Credit can be claimed. The plan increases the amount of expenses eligible for the credit, relaxes the credit reduction due to income levels and makes it fully refundable. This means that, unlike in other years, employers can still get the credit even if they don’t owe taxes.
Avoiding An Unexpected Tax Bill
To avoid an end-of-year tax bill or penalties for not paying taxes on earned income, employees can ask their employer to withhold federal income tax from their paycheck. Employers must be willing to do this voluntarily since it isn’t a requirement. To determine how much to withhold, employees can fill out IRS Form W-4, or you can make estimated tax payments. Use the IRS Form 1040-ES to determine estimated taxes or the IRS’s free tax estimator to estimate how much to withhold from pay.
