The Household Employee Problem. Nanny Tax. This often overlooked bookkeeping and payroll tax requirement can cause a tangle of tax problems if not handled correctly. It ended a run for Congress by Caroline Kennedy (JFK’s daughter) and killed a U.S. Attorney General nominee’s chances for appointment. Could you be impacted? This is what you need to know.
Nanny Tax Explained
In an effort to capture income from household employees, the tax code requires you to obtain employee information, pay the related state and federal taxes, and withhold taxes for anyone you employ around the house. The requirement comes into play if you pay any one individual $2,100 or more in 2019 (unchanged from 2018). You must then submit a W-2 for each of these “household employees”.
Who is Covered?
The household workers typically covered by this law include:
Employee or Not an Employee
Before you panic, first determine whether your help is an employee or not. If in the eyes of the tax code, your help is not an employee the nanny tax rules DO NOT apply. What does the IRS look for?
- Who controls how the work is done? If the worker clearly does, then the person is self-employed and not your employee.
- Whose tools are used? If the worker’s tools are used then they are more likely self employed and not your household employee.
- Work exclusively for you? If the worker has a number of customers then they are less likely to be your household employee.
- Does an agency supply the worker? If an agency supplies the worker and controls what work is done and how it is done, the worker is not your employee.
- Daycare services at an offsite location. If your childcare is conducted in the worker’s home, that worker is generally not your employee.
- Have your help become incorporated. The reporting rule only applies to hired individuals. If your household help is in a LLC or Sub chapter S-Corporation, it is up to that company to employ the worker and pay their employment taxes.
- Be aware of the annual limit. Make sure your total payments do not exceed the reporting threshold each year.
- Determine if the hired help are truly employees or self-employed.
- Rotate services. If you have help with yard work consider employing a number of helpers to make sure no one person is paid above the reporting threshold.
- Make the determination now. If you think you may have a household employee, ask for a review. Waiting until the end of the year can create a reporting problem for tax payments due during the course of the year.
- Follow the IRS Checklist. If you are hiring a qualified household employee, here is a brief checklist provided by the IRS to help keep you out of harm’s way:
- Find out if the person can legally work in the U.S. (form I-9)
- Find out if you need to pay state taxes
- Withhold social security and Medicare taxes
- Withhold federal income tax if required
- Determine if you are required to pay federal and/or state unemployment taxes
- Determine the payment method and make tax payments
- Get an employer identification number (EIN)
- File W-2s each year and provide copies to your household employees
- File household employment tax form with your annual tax return
- Keep good records
Lets Taco bout taxes…
Household Employment Taxes
Taxpayers with household employees must file Schedule H (Form 1040), Household Employment Taxes, to report FICA tax, FUTA tax, and federal income tax withholding (if any). Form W-2 must be filed for each household employee who was paid Social Security or Medicare wages of $2,200 (2020) or more, or wages of any amount if federal income tax was withheld. Taxpayers who are required to file Schedule H (Form 1040) with their 2020 individual tax returns must obtain an Employer Identification Number (EIN) by February 1, 2021.
The Social Security tax pays for old-age, survivors, and disability benefits for workers and their families. The Medicare tax pays for hospital insurance. Both the employer and the household employee may owe Social Security
and Medicare taxes. For 2020, the employer and employee share is 7.65% (6.2% for Social Security tax and 1.45% for Medicare tax) of the employee’s FICA wages. The employer is responsible for remitting both the employee’s and employer’s share of the taxes. Typically, the employee’s share is withheld from the employee’s wages and submitted with the employer’s payment.
Figuring FICA taxes
FICA taxes on Social Security and Medicare wages paid to household employees are calculated by the employer. If you pay your household employee cash wages of $2,200 or more in 2020, all cash wages you pay to that
employee in 2020, up to $137,700 are Social Security wages and all cash wages are Medicare wages. However, any noncash wages paid do not count as FICA wages. If you pay the employee less than $2,200 in cash wages in 2020, none of the wages are FICA wages and neither you nor the employee will owe FICA taxes on those wages.
Cash wages include wages paid by check, money order, etc. They do not include the value of food, lodging, clothing, and other noncash items you give your household employee. However, cash you give your employee
in place of these items is included in cash wages.
Wages Not Counted
Do not count wages paid to any of the following individuals as FICA wages.
1) Your spouse.
2) Your child who is under age 21.
3) Your parent. Exception: Count these wages if your parent cares for your child who is either under age 18 or has a physical or mental condition that requires personal care by an adult. Also if your marital status is either divorced, widowed, or living with a person whose physical or mental condition prevents him or her from caring for your child.
4) An employee under age 18 at any time during the year. Exception: Count these wages if providing household services is the employee’s principal occupation.
The federal unemployment tax is part of a federal program that pays unemployment compensation to workers who lose their job. Like most employers, you may owe both the federal unemployment tax (FUTA) and a state unemployment tax. The FUTA rate is 6% of your employee’s FUTA wages. However, you may be able to take a credit of up to 5.4% against FUTA tax, resulting in a net tax rate of 0.6%. Note: FUTA tax is not withheld from
employee’s wages. You must pay FUTA from your own funds.
Figure the FUTA tax on FUTA wages paid. If you pay cash wages to all your household employees totaling $1,000 or more in any calendar quarter of 2019 or 2020, the first $7,000 of cash wages you pay to each household
employee in 2020 is FUTA wages.
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