Unless you are trained in taxation, the IRS guidelines can seem daunting to understand. Every year families are faced with the decision on whether or not to hire a household employee. While there are many ins and outs of hiring a caregiver, nanny, household employee, or housekeeper – it is important to have a basic understanding of your responsibilities as well as understanding how to handle your future household employee. To kick start this conversation we have outlined some of the most common questions that our firm has come across during tax planning:
Who would be considered a household employee?
Per the IRS “you have a household employee if you hired someone to do household work”. In layman's terms you have a household employee if you hire someone to complete specific tasks and jobs around your home. This worker can be full time, part time, seasonal and they can be paid hourly, by salary or by job. Examples of household employees are babysitters, butlers, drivers, housekeepers, nannies, cooks and health aides.
What will my household employee need to provide for employment?
There are three main items that a household employee has to be able to provide to the future employer at the time of being hired:
- A Social Security number or an ITIN; 2. A completed Form I-9 with proper identification; and, 3. A completed federal W-4 form and corresponding state income tax withholding form
Do I need to pay employment taxes?
If you pay your household employee $2,000 or more in one calendar year then the IRS states that you are considered a household employer and will be subject to the household employment taxes. Household employment taxes are a combination of withholding federal withholding from your household employee, as well as your portion and the household employee’s portion of Social Security, Medicare, and other state income taxes. As a household employer you may also have state unemployment insurances taxes due as well. Note: it is important to consult your local tax accountant because not all states operate the same way and you would want to ensure you are compliant with all household employee tax obligations.
Is there a penalty if I pay my household employee “Under the Table”?
In short, yes! In recent years the IRS has developed further guidance on the punishments of not following the proper regulations. Possible punishments can result in tax evasion charges, loss of professional license, and penalties for not only the current taxes but the penalties and interest as well.
What is the difference between giving issuing a 1099 or, a W-2?
Whether you would issue a 1099 or, a W-2 would depend on a few key differences. For instance, the IRS states “if only the worker can control how the work is done, then the worker is not your employee” – they would be considered an independent contractor. Per the IRS, a 1099 would be issued to an independent contractor once they earn more than $600 in one calendar year and if the payments are made in the course of your trade or business. Personal payments are not reportable. With regards to issuing a W-2 to an employee, the IRS states “the worker is your employee if you can control not only what work is done, but how it is done”. If your household employee falls under the latter description then be sure to consult with your local tax accountant to ensure you become compliant with all of the household employee forms, and tax obligations.
While these are just a few of the common questions there are many other aspects to consider when hiring a household employee. It may seem as though the requirements outweigh the benefits; however, as the employer you will benefit as well as your employee. Hiring a household employee is not as daunting once you understand the ins and outs of becoming a household employer.
For more information or questions on these and other tax issues, contact Brittany Malidore at 425.69.1990 or firstname.lastname@example.org.