Section 3101 of the Internal Revenue Code imposes a tax on wages earned by an employee. The responsibility to deduct this tax (commonly known as employment taxes ) lies on the household employer. So, if you are employing people for housekeeping or as a maid or a gardener or a nanny for your child (read what is nanny tax? ), then he/she is required to deduct social security and medicare taxes (referred to as FICA tax) from wages paid to household employees and deposit with IRS. Apart from that, a household employer is also required to pay federal unemployment tax.
Common example of household workers
Household work is work done in or around your home. If a worker is your employee, it doesn’t matter whether they work is full or part-time or that you hired the worker through an agency or from a list provided by an agency or association. Also, it doesn’t matter if the wages paid are for work done hourly, daily, weekly, or by the job. Some examples of workers who do household work are:
|Caretakers||Health aides||Private nurses|
|Cleaning people||Housekeepers||Yard workers|
How to distinguish between a household employee and a contractual worker?
The simple rule to distinguish between a household employee and a contractual employee is to assess whether you as an employer have total control over how the employee does the job. If the answer is yes, he/she is a household employee. A most common example of household employees are housekeepers, maids, babysitters, gardeners, personal drivers and others who work in your house as your employee.
In contrast, when you hire services of other skilled persons like repairmen, plumbers, contractors, and other business people, they work in accordance with a verbal or written agreement and you have little or no control on them. They are therefore not regarded as a household employee.
What are household employment taxes?
You, as a household employer has the responsibility to pay IRS following two taxes for each household employee :
- Social security and Medicare taxes (commonly known as employment tax or FICA tax)
- Federal unemployment tax.
In some cases only one of them and in some cases, both may be payable by the employer. The payment of tax is by withholding a portion and then paying to IRS.
How much federal employment tax ?
Social security and Medicare taxes (FICA) applies to both employees and employers, each paying 7.65 percent of wages. An employer is generally required to withhold the employee’s share of FICA tax from wages.
- If you pay cash wages of $2,300 or more for 2021 to any one household employee, you generally must withhold a total of 7.65% (6.2% of social security and 1.45% of Medicare taxes) from all cash wages you pay to that employee.
- You must also pay your share of social security and Medicare taxes, which is also 7.65% of cash wages you pay to all household employees.
So, your liability to pay taxes as a household employer is 15.30 % of total cash wages.
However, the social security wage base limit for the year 2021 is $142,800 (In 2020, it was $130,700). That means anyone getting a salary of more than $142800 in a year is not subject to social security tax. There is no wage base limit for Medicare tax.
Social Security Tax Calculator for Household Employer
Is the household employer liable for additional medicare tax?
Additional Medicare Tax applies to an individual’s Medicare wages that exceed a threshold amount based on the taxpayer’s filing status. Employers are responsible for withholding the 0.9% Additional Medicare Tax on an individual’s wages paid in excess of $200,000 in a calendar year, without regard to filing status. There’s no employer match for Additional Medicare Tax. For more information, please read this post on Additional Medicare Tax.
When not to pay any federal employment tax ?
Don’t withhold or pay Social Security and Medicare taxes from wages you pay to:
- Your spouse,
- Your child who is under age 21,
- Your parent, unless an exception is met, or
- An employee who is under age 18 at any time during the year, unless performing household work is the employee’s principal occupation. If the employee is a student, providing household work isn’t considered to be his or her principal occupation.
See Publication 926 PDF for more information on these exceptions.
How much federal unemployment tax you must pay?
A household employer may also be liable to an unemployment tax levied as per the Federal Unemployment Tax Act (FUTA) for funding the unemployment account of the government. The FUTA tax rate is 6% of the first $7,000 paid to each employee annually. While FUTA tax is imposed on employers only, not their employees. Employers must file IRS Form 940 annually in conjunction with paying unemployment tax.
If you pay total cash wages of $1,000 or more in any calendar quarter to a household employee, you are legally required to pay federal unemployment tax which is 6% of cash wages. However, you do not have to pay unemployment tax in wages of any employee is over $7,000 a year.
How to report household employee income?
In other words, you are asking “What forms must a household employer file with IRS?”. The answer is simple – if you pay social security and medicare wages or FUTA wages or wages from which you withhold federal income tax, you must file the following two forms to IRS.
- Form W-2-You must file a separate 2021 Form W-2 for each household employee and give Copies B, C, and 2 to your employee by February 1, 2022 for tax year 2021 (filing 15th April 2022). You must also send Copy A of Form W-2 with Form W-3, Transmittal of Wage and Tax Statements, to the SSA by February 1, 2022.
- Schedule H-Use Schedule H to Form 1040 (your tax return form ) to report household employment taxes with your 2021 federal income tax return by April 15, 2022.
What happens if you comply with employment tax laws?
If you do not pay the employment tax, you may be liable for interest and penalties. In addition to that , if you do not comply with the procedure of filing various forms related to employment tax, you may be liable for : :
- Pay a penalty if you don’t give Forms W-2 to your employees or file Copy A of the forms with the SSA by the due dates.
- You may also have to pay a penalty if you don’t show your employee’s social security number (SSN) on Form W-2 or don’t provide correct information on the form.
How to pay employment taxes?
Fill Schedule H properly and you get your total household employment taxes. Add these household employment taxes to your income tax. Pay the amount due by April 15. You can pay your estimated tax payments for the year to cover household employment taxes on Form 1040-ES.
You can use various methods for the payment of taxes. Like using the payment vouchers in 1040-ES to make your payments by check or money order or by made by cash, credit or debit card, and several electronic payment methods. For details, see the form instructions or go to IRS.gov/Payments.
You can find the specified dollar amounts and percentages under the topic “Do You Need To Pay Employment Taxes?” in Publication 926, Household Employer’s Tax Guide.