Tax Breaks for Charitable Giving: Maximize Your Impact and Your Savings
Category: Business
What does the IRS consider a household employee?
If you have a household employee, you may need to withhold and pay Social Security and Medicare taxes (FICA), federal unemployment tax (FUTA), or both.
To determine whether or not you may need to withhold and/or pay taxes for someone working in your private residence, it’s essential to know the type of worker you have. To do this, you need to understand the difference between a household employee, as defined by the IRS, and other types of workers. For example, some workers are considered self-employed even if they work in or around your home.
The IRS views payments made to these two different types of workers differently. Generally, if the worker is an employee, you may be responsible for meeting some tax requirements. On the other hand, if the worker is self-employed, you may not need to withhold or pay any taxes, as the worker’s earnings are subject to self-employment tax and, therefore, not your responsibility.
There can be consequences for getting this wrong, so you must understand the type of worker you have hired and your tax responsibilities connected to that relationship.
What is the difference between a self-employed worker and a household employee?
If you have hired a worker to perform work in or around your home but are not sure whether that worker is a household employee or self-employed, there are a few questions you can ask yourself that may bring clarity, such as:
- Are you able to control and direct not only the result of the work but how it is executed?
- Can you instruct when and where to work, what tools to use, or where to purchase supplies and services?
- Are you providing work tools, or is the worker performing a service they don’t offer to the general public?
If your answer to all of these questions was “yes,” you likely have a household employee. Some examples of workers who may fall under this category include the following:
- Babysitters age 18 or older.
- Domestic workers.
- Private nurses.
- Health aides.
- Yard workers.
- Housecleaning workers.
On the other hand, if only the worker can control how the work is done, provides their own tools, and offers services to the general public as an independent business, that worker is not a household employee but is self-employed.
A few things to note:
- It does not matter whether the work is full-time or part-time.
- A worker hired through an agency is not your employee if the agency is responsible for who does the work and how it is done.
- It also does not matter whether the worker is paid hourly, daily, weekly, or by the job.
- A worker who performs child care services in their home is generally not considered a household employee.
For more details on the difference between an employee and an independent contractor as it relates to hiring for your business (as opposed to your household), take a look at our recent blog entry on the subject.
Do you need to give a 1099 to your cleaning person?
If the worker performing services in your household is not your employee but is self-employed as an independent contractor, your federal tax responsibilities are few.
In fact, due to an exception for household workers, you may not even need to fill out a 1099, the type of form the IRS usually requires for independent contractors.
The reason for this exception is that 1099-MISC forms are generally for reporting business-related payments, not personal payments. Therefore, you don’t need to file a 1099 for services rendered to maintain your household.
On the other hand, if the household worker is an employee, as defined above, you do have some responsibilities. To start with, you’ll need to get an employer identification number (EIN), verify that your employee is legally authorized to work in the United States, and, of course, consider the tax implications of your hire.
How does a household employee affect taxes?
If you have a household employee, you may need to withhold and pay Social Security and Medicare taxes (commonly referred to as the FICA tax). You may also owe Federal Unemployment Tax (FUTA) and federal income tax withholding.
To determine whether you need to pay employment taxes such as these, use this table:
| IF you… | THEN you need to… |
| A. Pay cash wages of $2,400 or more in 2022 to any one household employee.
Don’t count wages you pay to:
Any employee under the age of 18 at any time in 2022 (see Wages not counted, later, for an exception). |
Withhold and pay social security and Medicare taxes.
|
| B. Pay total cash wages of $1,000 or more in any calendar quarter of 2021 or 2022 to household employees.
Don’t count wages you pay to:
|
Pay FUTA tax.
|
| 1 In addition to withholding Medicare tax at 1.45%, you must withhold a 0.9% Additional Medicare Tax from wages you pay to an employee more than $200,000 in a calendar year. You must begin withholding Additional Medicare Tax in the pay period in which you pay wages more than $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Additional Medicare Tax is only imposed on the employee. There is no employer share of Additional Medicare Tax. All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid more than the $200,000 withholding threshold. |
| Note. If neither A nor B above applies, you don’t need to pay any federal employment taxes. But you may still need to pay state employment taxes. |
To report FICA tax, FUTA tax, and federal income tax withholding (if any), you must file Schedule H (Form 1040) with the IRS.
Additionally, you should contact your state unemployment tax agency to determine whether you need to pay state unemployment tax for your household employee. For a list of state unemployment tax agencies, visit the U.S. Department of Labor’s website. You should also determine if you need to pay or collect other state employment taxes or carry workers’ compensation insurance.
Do household employees receive a W-2?
If you pay your household employees Social Security and Medicare wages of $2,400 or more during the year or wages from which you withhold federal income tax. In that case, you must complete and file a separate 2022 Form W-2 for each qualifying employee.
That means you must complete the form and give Copies B, C, and 2 to your employee by January 31, 2023. You must also send Copy A of the form with Form W-3 to the Social Security Administration by January 31, 2023.
You can electronically file Form W-2 quickly, securely, and for free using the SSA’s electronic filing service — visit the SSA W-2 Filing Instructions and Information website for guidelines on how to do so.
Do I need to withhold federal income tax from a household employee?
In short: Probably not. The IRS does not require household employers to withhold federal income tax from wages they pay to a household employee. However, if your employee asks you to withhold federal income tax and you agree, you will need to do so.
In that case, you will need to obtain your employee’s completed Form W-4, Employee’s Withholding Certificate. You will need to calculate your withholding based on the information the employee submits on their W-4. See Publication 15-T, Federal Income Tax Withholding Methods, for withholding tables that are updated each year.
Can you write off a household employee?
We’ll close this article with some good news for household employers: Some tax breaks may be available for you, especially if your household employee’s function is related to caregiving — for example if they are a nanny or senior caregiver.
If so, you may be able to deduct the wage paid as part of the dependent care expense deduction. Additionally, you may be able to deduct the employer portion of your FICA (Social Security and Medicare) taxes and any federal and state unemployment taxes you pay on behalf of your household employees.
One final word: Although it may be tempting to think that you can pay your household employee “under the table,” there are some significant concerns related to this approach. For example, let’s say your employee stops working for you and files for unemployment, student aid, or a tax return to get a loan. All of these circumstances can lead to your being audited and becoming liable for penalties and interest payments on the taxes you should have paid.
Worse still, if your employee is injured on your property, you could become personally liable for the injury — with no Workers’ Compensation insurance to help.
Evading your household employer taxes may seem like a way to save some money in the short term, but the financial toll in the long term can and may far outweigh your savings.
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