Household Employment Taxes (Nanny Tax)
If a taxpayer hires someone to provide household services, and the taxpayer controls the manner of the work, then the hired person is considered an employee, for which the taxpayer must pay Social Security and Medicare taxes — otherwise known as Federal Insurance Contributions Act, or FICA taxes — and federal unemployment taxes, which is often referred to in the tax code as Federal Unemployment Tax Act, or FUTA taxes.
Whether FICA taxes must be withheld and FUTA taxes paid depends on whether the service provider is an employee or independent contractor. Generally, an independent contractor is one who determines how the work is done, provides his own tools, and is otherwise free from control from the taxpayer, and also generally offers his services to the public. However, if the taxpayer controls how a job is done, then the taxpayer will be considered an employer, subject to the rules for employers.
However, the tax code excludes certain types of people from the employee definition, which includes the taxpayer's spouse, parents, and children younger than 21. Also, anyone who is younger than 18 at any time during the tax year and does not have a business of providing household services is also excluded. Thus, a student younger than 18 satisfies this requirement.
So that taxes can be paid for the right employee, the taxpayer must obtain the Social Security number of each employee, which identifies the employee to the IRS. Names and Social Security numbers can be verified at the Social Security Administration's website at www.SocialSecurity.gov/employer. Individual taxpayer identification numbers (ITIN) are not acceptable, since only resident and nonresident aliens who are not permitted to work in the United States have an ITIN for tax purposes.
To prevent aliens from working illegally within the United States, the taxpayer must verify the employment status of each potential employee by completing the US Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification or use instant electronic verification. Form I-9 should be kept as a tax record. Additional information can be found at www.uscis.gov.
Social Security and Medicare Taxes
Generally, FICA taxes of 15.3% must be paid for each employee – 12.4% for Social Security and 2.9% for Medicare. The taxpayer, as an employer, must pay ½ of FICA taxes for each employee, which equals 7.65% of their wages, and, unless the taxpayer decides to pay the entire amount for the employee, withhold the employee's 7.65% share from their wages. However, if the wages are below an annual threshold, then FICA taxes do not have to be reported or paid. For 2011 and 2012, the Social Security tax rate for the employee's share was 4.2%, but the employee percentage has returned to 6.2% post-2012.
|2018 - 2019||$2,100|
|2016 - 2017||$2,000|
|2014 - 2015||$1,900|
|2012 - 2013||$1,800|
Once the annual threshold is exceeded, then even the amounts below the threshold are also subject to FICA taxes.
If the taxpayer decides not to withhold the FICA taxes from wages, but instead pays the tax herself, then the tax payments of the employee's share must be added to the wages that he was paid. However, the additional wages are not subject to either FICA or FUTA taxes.
|Social Security Tax Rate||12.4%|
|Medicare Tax Rate||2.9%|
|Employee's Share of Social Security Tax Rate||6.2%|
|Employee's Share of Medicare Tax Rate||1.45%|
|Total Cash Wages||$2,500|
|Social Security Tax||$155.00||= Total Cash Wages × ½ of Social Security Tax Percentage|
|Medicare Tax||$36.25||= Total Cash Wages × ½ of Medicare Tax Percentage|
|Total Wages||$2,691.25||= Cash Wages + Employee's Share of (Social Security Tax + Medicare Tax) Paid by Employer|
The taxpayer may also have to make estimated tax payments for the household employment taxes, if the amount owed is greater than $1,000; otherwise, the taxpayer may be subject to a tax penalty of additional interest on the underpayment.
In the unlikely event that the employee earns more than the Social Security wage base, which is $118,500 for 2015, then the amount over the base is not subject to Social Security taxes but is still subject to the 2.9% Medicare tax. If the employee earns more than $200,000, then the employer may also have to withhold the new Additional Medicare Tax of 0.9% from the employee's wages.
Fringe benefits that are excludable from taxable income include:
- lodging or meals on the premises if it is at the convenience of the employer;
- allowance for vehicle transportation or mass transit costs, of up to $245 per month;
- allowance for qualified parking costs of up to $245 per month.
Income taxes do not have to be withheld for household employees, but if the employee requests it, then the employee must furnish a Form W-4, Withholding Allowance Certificate.
The taxpayer should contact the state Labor Department to determine if employees have to be covered by workers compensation insurance or if other state employment taxes must be paid.
Federal Unemployment Tax (FUTA)
The FUTA rate is 6.2% of the 1st $7000 of cash wages paid to each household employee. FUTA liability arises if the taxpayer pays cash wages of $1000 or more for household services during any calendar quarter. However, there is no FUTA liability for wages paid to a spouse, parents, or children under age 21.
A credit of up to 5.4% for state unemployment taxes can be claimed to reduce FUTA liability resulting in a net FUTA tax rate of 0.8% for the federal government. However, the whole credit is only available for those employers who pay the entire required state unemployment fund contributions by the tax due date for the calendar year; otherwise the credit is limited to 90% of the pre-deadline credit.
The state credit may be reduced or eliminated if the state is a credit reduction state, which is a state that has failed to pay back money borrowed from the federal government to pay unemployment benefits. The reduction amount is listed for each state in the Schedule H instructions.
Household Employment Tax Forms and Reporting
If the taxpayer is a household employer, then the taxpayer will require an employer identification number (EIN) that can be obtained by filing Form SS-4, Application for an Employer Identification Number with the IRS.
FICA and FUTA taxes are reported on Schedule H, Household Employment Taxes. Schedule H is used to report Social Security and Medicare taxes, federal income taxes withheld, and FUTA taxes for household employees. The liability for household employment taxes is then reported as Other Taxes on the taxpayer's Form 1040.
Copies of Form W-2, Wage and Tax Statement must be sent to each employee paid more than the annual threshold amount by January 31 following the end of the calendar year and to the Social Security Administration by February 28, or April 2 if filed electronically. (See https://www.socialsecurity.gov/employer/ about electronic filing.) Total wages are reported in Box 1 of Form W-2. Total wages includes the employee's share of FICA taxes. However, only cash wages are reported as Social Security and Medicare wages in Boxes 3 and 5 of Form W-2. If the taxpayer does not provide a copy of Form W-2 to each employee, then the taxpayer must provide a notice about the earned income credit, which is provided in Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC).
An employer whose total tax liability does not exceed $1000 can file Form 944, Employer's Annual Federal Tax Return to report and pay the tax after year-end.
If the taxpayer is a self-employed business person who also has regular business employees, then the taxpayer can choose to report taxes for household employees on Schedule H, or, the taxpayer can choose to report all employee incomes quarterly on Form 941, Employer's Quarterly Federal Tax Return and report FUTA taxes annually on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return or Form 940-EZ.