Whenever you hire a household employee to whom you pay wages of $1,900 or more in a year, you enter a maze of government forms and tax rules that you must follow to avoid getting in trouble with the Internal Revenue Service (IRS) – and, potentially, U.S. Immigrations and Customs Enforcement, if you are employing someone who can’t legally work in the U.S. 

Fortunately, wages paid to your spouse and any children under the age of 21 are excluded. So are monies paid to an employee under the age of 18, provided the household employment is not that person’s principal occupation. That would exclude, say, a 17-year-old student who puts in hours as a babysitter. 

Some people try to sidestep these laws and regulations by claiming a household worker is an independent contractor rather than an employee, but there are some rigid tests that must be passed for that claim to qualify. One key IRS test that usually ends in the determination that a household worker is an employee: “If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.” 

If you misclassify workers as independent contractors to avoid paying taxes the result can be a huge tax bill and even penalties for not paying payroll taxes and failing to file the proper forms. In fact, the only way to avoid the requisite paperwork and tax bills is to hire employees through an agency that does all of this work for you. Not using an agency? Follow the steps here.

Forms To Fill Out And File Before You Hire

Before you actually hire someone, you'll need to complete the I-9, Employment Eligibility Verification form, which includes sections for you and your potential employee. Once you have both filled out the form, you should keep it in a file with other hiring documentation in case there is ever a question about your employee’s legal right to work in the U.S. (This form does not have to be filed with the government.)

Next, you need to contact your state employment agency to see if there are any forms that need to be filed at the time you hire someone. You also need to find out what, if any, state taxes must be paid. A great place to start your research on state rules and regulations is Payroll-taxes.com

Be sure to check that any potential employees have their Social Security number. If not, they must obtain one from the Social Security Administration (SSA) before they start working for you. If they tell you their Social Security card is lost, you will need to ask them to apply for a replacement from the SSA. You don’t want to risk getting in trouble for hiring a worker who is not eligible for employment in the U.S. 

You also should apply for an Employer Identification Number (EIN) from the IRS. There is no charge for this service, which is available online, by fax or by mail.

Taxes You Must Withhold

When you pay your employee, you will need to withhold the employee’s contribution to Social Security and Medicare taxes from his or her paycheck (unless you decide to pay both the employee’s and employer’s contributions to these taxes, in which case you wouldn’t withhold anything from the paycheck). The government requires 15.3% of cash wages – 2.9% for Medicare and 12.4% for Social Security. One half of that is the employee share, the other half is the employer share. So, if you do withhold these taxes from your employee’s paycheck, you must deduct 1.45% for Medicare and 6.2% for Social Security. 

You are not required to withhold federal income tax from a household employee’s wages unless he or she asks you to do so. But you will need to check with your state employment office to find out if any state income taxes must be withheld.

Another tax you may be required to pay is the Federal Unemployment Tax (FUTA). You become liable for this tax if you pay more than $1,000 per quarter to household employees. The FUTA is 6% of your employee’s FUTA wages up to the first $7,000 earned. You may be able to reduce the federal taxes if your state requires you to pay state unemployment tax. In fact you can get a credit up to 5.4% depending on your state’s unemployment rules.

Records You Must Keep

As you pay your employee(s), you need to keep detailed records. You should have written proof of:

• Each employee’s cash and noncash wages.

• The taxes you agree to pay on your employee’s behalf, such as the employee portion of Social Security tax or Medicare tax.

• Any taxes you withhold for the employee.

• Any taxes you pay as the employer, such as unemployment taxes.

• A record of each employee’s Social Security number.

Forms You File At the End Of The Tax Year

As long as you’ve kept accurate records, it should be fairly easy to file the end-of-year tax forms. By January 31 of the next year (or the first work day after January 31), you will need to provide your employees with a completed W-2, Wage and Tax Statement, which shows them how much they have earned during the previous year and how much has been withheld for tax purposes. By the end of February, you must send a copy of this W-2 to the Social Security Administration. Generally, it’s a good idea to submit it at the same time you give it to your employee to avoid forgetting to send it later.

When you file your personal income taxes for the year, you will need to include Schedule H, Household Employment Taxes to report the household taxes for which you are obligated. If the employee-related taxes will add significantly to the taxes you owe, you should include payments toward those taxes in quarterly estimated tax payments.

Estimated tax payments are due on the 15th of the month in April, June and September during the tax year, and on January 15 of the next year. If the due date falls on a non-work day, estimated taxes are due on the next work day. If you fail to pay estimated taxes, you could end up paying interest and penalties depending on how much you still owe in taxes. Generally, you must pay at least 90% of the taxes you owe by January 15 of the next year. You can’t wait until you file your taxes by April 15 to make payments up to the 90%, but you can avoid penalties and interest if you pay that last 10% by April 15.

The Bottom Line

When you hire household employees, there is a lot of government paperwork to fill out and myriad rules to follow. Make a checklist of all the steps and dates for tax filings, and keep organized records. Be sure you know what is expected of you so you can avoid any problems with the IRS or other governmental entities.

See Umbrella Insurance & Household Help and How Umbrella Insurance Works to learn about added insurance coverage you may need when you hire household employees.

 

 

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.