MONEY MANAGEMENTFrom the Virginia Society of Certified Public Accountants - Presented by Dean Knepper, CPA, CFP®
HIRING A HOUSEHOLD HELPER? BETTER BRUSH UP ON EMPLOYMENT TAXES
(June 1, 2006) -- If you've hired someone to care for your children you may have to pay employment tax. These taxes, referred to collectively as the "nanny tax," actually apply to any household employee who works in your home or on your property. The Virginia Society of CPAs provides answers to common questions concerning employment taxes.
What workers are covered by the household employer rule?
Babysitters, maids, housekeepers, yard workers and similar domestic workers are all examples of household workers. It doesn't matter if the employee works for you full-time or part-time, year-round or seasonally.
Plumbers, electricians, and repairmen are typically independent contractors. The difference between employees and independent contractors generally depends on the amount of control the employer has over the worker. An independent contractor generally provides his/her own tools, determines work hours, and works for other people as well. If you control not only the work that is done, but also how and when it is done, the worker may be considered your employee.
What if I hire a neighborhood teenager?
As long as the teenager you hire is under age 18 and performing household work is not the worker's principal occupation, you are not required to pay employment taxes. Nor do you need to pay employment taxes for household work completed by your spouse, your child under age 21, or your parent(s).
What employment taxes must I pay?
You are required to pay Social Security and Medicare (FICA) taxes if you pay wages of $1,500 or more to an employee in 2006. The federal unemployment tax (FUTA) comes into play if you pay your household employee $1,000 or more during any calendar quarter of the tax year. You may also be required to pay state unemployment taxes.
In calculating your employee's wages subject to employment taxes, do not include the value of food, lodging or clothing you give to your household employee.
How much will I pay?
The tax for Social Security and Medicare equates to 15.3 percent of your household employee's gross wages. You and your employee each pay half (6.2 percent each) toward Social Security and half (1.45 percent each) for Medicare. If you choose to, you may pay your employee's share of FICA taxes. In such cases, the amount you pay on your employee's behalf must be included in the worker's wages for income tax purposes.
FUTA tax is 6.2 percent of the first $7,000 of FUTA wages you pay to your employee. Although you are responsible for paying the entire FUTA amount, you may get some of that money back as a credit.
What about federal income tax?
You are not required to withhold federal income tax from wages you pay a household employee. However, if your employee asks you to withhold federal income tax and you agree, you will need Form W-4, Employee's Withholding Allowance Certificate, and Publication 15, which has tax withholding tables.
What tax forms must I file to comply with IRS requirements?
Employers of household workers use Schedule H, Household Employment Taxes, to compute total household employment taxes. Add the household taxes due to your income taxes and pay the total by your filing due date.
Where can I get help?
The rules governing employment taxes are complex, and the penalties for non-compliance are serious. A CPA can help you understand your responsibilities for paying and reporting employment taxes for household help.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
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