A number of years ago, the IRS started requiring taxpayers to pay taxes on household employees. Although often called the “nanny tax”, it can apply to much more than just those who care for children. Payments for services related to housekeeping, gardening, care-giving for an elderly relative or spouse, or any other domestic work could be subject to this tax.
If the worker controls how and when the work is conducted, the worker is generally not an employee. Employee status is determined without regard to whether the work is full or part-time, how the worker is paid, or whether the worker is obtained through an agency. The key factor is who controls and directs the work.
If an agency provides the worker and controls how the work is conducted, the worker is generally not an employee for purposes of this tax. But if an agency merely provides a list of workers and does not control how the work is conducted, the worker may be a household employee.
If a worker qualifies as household employee and the worker is paid more than $2,000 during the tax year, household employment taxes apply. The tax is typically reported by the employer through the Federal Form 1040, Schedule H. The employer has the option to pay both the employer and employee portions of the FICA and Medicare of 15.3% or they can withhold the employee’s portion from their wages.
In addition, if any household employee is paid more than $1,000 in any calendar quarter of 2017, federal unemployment taxes will also be owed. State unemployment taxes could also be owed, and workers compensation coverage may apply. Ohio requires that an employer carry workers compensation coverage. Some states, such as Florida, do not require workers compensation coverage for one employee, so consideration should be given to adding a workers compensation rider to your homeowners insurance.
The Fair Labor Standard Act also applies to household employees. Two important considerations include you must pay minimum wage and overtime rules apply.
Although this is a tax bill that is often overlooked, there can be serious consequences to ignoring it. At least one of President Trump’s picks for a top position in his administration had to withdraw his nomination because of not paying household employment taxes, and non-payment of these taxes has also caused problems for several other nominees in prior administrations.
If you are concerned that household employment taxes may apply to you, please contact your GBQ tax advisor to address this potential issue.
Article written by:
Rick Kay, CPA
Tax Senior Manager