Question: Do I Have to Pay Taxes for Domestic Services I Employ?
Individuals who employ domestic services, such as nannies, cleaning services, gardeners, housekeepers, and other workers in their homes are considered employers (specifically "household employers," according to the IRS) and they must comply with all the regulations concerning employees. This article will review the basics you need to set become an employer, pay domestic employees, and comply with federal and state employment laws and regulations.
As a household employer, you must comply with federal and state employment laws and regulations. Here is a brief overview of what you must do:
First, determine if you owe FICA taxes for this domestic worker
Sometimes called the "nanny tax," you must pay and withhold FICA taxes for domestic workers if you pay a worker more than $1700 annually (for 2010 and 2011). The tax is per worker, so if you pay several workers more than $1700 each, the tax must be paid for each worker. Read more about the "Nanny Tax" and whether it applies to, from Katherine Lewis at Working Moms. Katherine also has a list of exceptions-cases in which you do not have to pay this tax for your domestic workers.
What are FICA taxes? FICA taxes are paid half by employers and half by employees for Social Security and Medicare. The tax is 15.3% (13.3% for 2011, because the Social Security portion of the tax was reduced 2% for employees.). You must withhold the required amount from each employee paycheck and put aside an equivalent amount from your own funds. Read more about FICA taxes.
In addition to dealing with FICA taxes, you must also complete new hire paperwork and withhold federal and state income taxes and more. Here are the basics of what you must do:
- Get a federal employer identification number (an EIN) that is your employer registration, like a social security number
- You must have the employee complete new hire paperwork, including Form W-4 for federal tax withholding
- You must also verify your employee's eligibility to work in the U.S., using Form I-9. It is illegal to knowingly hire or continue to employ an illegal alien.
- Check to see if your employee is eligible for the earned income credit for low income individuals.
- You must also register with your state as an employer.
- Withhold federal and state (if applicable) income taxes and FICA taxes (Social Security and Medicare) from employee pay
- You must pay these withheld amounts to the IRS periodically and report quarterly on IRS Form 941 amounts owed and paid
- You must provide each employee an annual report of pay and withholding on Form W-2 and provide the Social Security Administration with copies of all W-2s and transmittal forms (on Form W-3).
- You must also pay federal unemployment taxes, based on the employee's wages.
Income Tax Reporting on Schedule H
If you pay a domestic worker $1700 or more (in 2010) you must file a Schedule H - Household Employment Taxes form along with your personal tax return. This form records information on how much you paid domestic workers, income taxes you withheld, and FICA taxes you withheld and paid during the year.
Read more about Schedule H - Household Employment Taxes from William Perez at Tax Planning.
If you hire a domestic independent contractor
If you hire a cleaning service or other independent contractor to work for you at home, you must:
- Have the independent contractor sign IRS Form W-9 to verify the tax ID number of this individual or company. If you do not have a tax ID number, or if the number is not correct, you must deduct backup withholding from each payment you make.
- Each year you must give the contractor IRS Form 1099-MISC if you have paid the contractor $600 or more the previous year, and you must submit the 1099-MISC to the Social Security Administration.
Read more about hiring and paying independent contractors.
If you are not sure if the worker is an employee or an independent contractor, read more about how to distinguish employees and independent contractors. This is sometimes a difficult task, so you may want to consult an employment attorney. You can also ask the IRS for a determination, by using Form SS-8. The IRS assumes that a worker is an employee unless you can prove otherwise, and the IRS audits employers to be sure that workers are properly classified.
To learn more about becoming an employer and your responsibilities for payroll and payroll taxes, this article on Payroll and Payroll Taxes Step by Step should be helpful.
For more information, see Publication 926 - Household Employer's Tax Guide.
Disclaimer: This article, and all information on this GuideSite, is not intended to be tax or legal advice, but is intended to be general information only. Each situation is different and tax laws change. Check with your tax and legal advisors before taking any actions on issues like this one.