Generally, hiring a nanny, home health aide, housekeeper, yard worker, cook, butler or driver gives a taxpayer the status of a household employer.  Being a household employer creates a responsibility to comply with employment tax requirements, as well as the federal Fair Labor Standards Act and the labor laws of each state. The definition of employment tax covers Social Security and Medicare taxes (FICA), as well as personal federal income tax and federal unemployment tax. A household employer is not required to withhold federal income tax. However, if the employer and employee agree that the employer will withhold voluntarily, the employee must complete IRS Form W-4.

For federal purposes, for the 2018 tax year, a household employer will need to withhold Social Security and Medicare taxes from the household employee’s pay if the employee is paid more than $2,100 per year. This threshold amount applies to each employee separately.  Upon reaching the threshold amount, taxes apply to all wages paid, even those below the threshold. Therefore, if an employer knows that the wages will exceed $2,100, withholding must begin from the first day of employment.

When the household employer is required to withhold Social Security and Medicare taxes, the withheld taxes should be remitted either annually with IRS Schedule H, or quarterly with the household employer’s estimated tax payments.  The timing of the payment will depend upon the amount of taxes owed and the taxpayer’s desire to reduce the potential of an underpayment penalty at the end of the year. Generally, when a household employer remits the withheld FICA taxes on IRS Schedule H, it is filed with the household employer’s personal income tax return at the end of the year. But, if the household employer does not file a personal income tax return, Schedule H can be filed on its own.  Depending upon the amount of taxes projected to be owed, the household employer may want to remit the taxes during the year as an estimated payment.  Making estimated payments will ensure that the employer does not owe an underpayment penalty at the end of the year.

If an employer withholds Social Security, Medicare, or federal income taxes, IRS Forms W-2 and W-3 must be completed and filed with the Social Security Administration (“SSA”), and provided to the employee, by January 31^st following the calendar tax year.  Every effort should be made to provide a copy of the W-2 to the employee for review before submitting it to the SSA, so that any discrepancies can be corrected before it is filed.

For purposes of the federal unemployment tax, the threshold is $1,000 per calendar quarter. This threshold applies to wages paid to all employees in the aggregate. Once the threshold is met and the responsibility arises, the employer must pay a 6.2% tax on the first $7,000 of wages paid. The entire unemployment tax amount is the responsibility of the employer and should not be withheld from the employee’s paycheck.   An employer must also pay unemployment taxes to the state.  In most cases, the taxes paid to the state can be credited against the federal unemployment tax.

In order to pay the taxes owed, a household employer must have an employer identification number (“EIN”).  The EIN is assigned by the Internal Revenue Service (“IRS”) and, in most cases, the EIN can be obtained immediately by applying online at IRS.gov.  If, however, the employer cannot obtain an EIN immediately online, Form SS-4 can be filled out and submitted via fax or mail.