What are household employee taxes, and why should they be filed legally?

Benefits of paying household employment taxes legally

Paying household employee taxes legally prevents legal trouble — like tax evasion and tax fraud charges. At the same time, it ensures important benefits for the people who keep your household running. 

With a clear work history, your employee will qualify for government programs that can make a big difference in their life. Without a clear history of regular paychecks, your employee will struggle to buy a car, get a student loan or acquire a mortgage.

Paying taxes on your household employee gives your employee a higher quality of life, and it gives you two valuable benefits as well: legal protection and peace of mind.

An overview of the household employment taxes you need to pay

If your household worker is an employee, you’ll need to pay at least three types of taxes: social security tax, Medicare tax, and federal unemployment tax. You may need to pay state unemployment tax, too, depending on what state you live in. And if your private service professional asks, you may also want to withhold federal and state employment taxes.

Domestic employees include nannies, butlers, private nurses, housekeepers, gardeners, and more — anyone who works in your home, if you control when and how they do the work. As their employer, you have a few tax responsibilities to make sure you follow employment law and to take good care of your employees.If you pay Social Security, Medicare, and unemployment taxes, then your household employee can take advantage of those protections. They can receive retirement benefits when they reach 62, free medical hospital insurance when they turn 65, and unemployment benefits if they find themselves unemployed.

Social security tax and Medicare tax for domestic employees

Together, these two taxes are sometimes called FICA taxes, because they are mandated by the Federal Insurance Contributions Act. As the employer, you pay half of each (on top of your employee’s wages), and your employee pays the other half (coming out of their wages). You can optionally pay your employee’s half as a gesture of support or gratitude.

You’re each responsible for a 6.2% tax that goes to social security and a 1.45% tax that goes to Medicare, totaling 7.65%. (Between your share and your employee’s share, FICA taxes reach 15.3%.)

As the employer, you need to withhold your household worker’s FICA taxes when you pay their wages. It’s up to you to make sure both halves are paid to the IRS. If you have a payroll service, it will take care of your taxes and your employee’s taxes automatically.

FICA taxes apply to any household employee who earns at least $2,400 in cash wages in a calendar year. (If your employee earns over $200,000, you’ll need to withhold an additional 0.9% Medicare tax on that additional income.)

Federal unemployment tax for household employees

The unemployment tax, also known as FUTA (required by the Federal Unemployment Tax Act), is calculated as 6% of your employee’s wages. However, it only applies on wages up to $7,000 a year. If your employee earns more than that, the rest isn’t taxed by FUTA.

This tax is solely your responsibility — don’t withhold it from your employee’s paycheck. You’ll need to pay it on top of their wages.

You can often get a credit of 5.4% when you file your Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return. But if you’re in a credit reduction state, your credit will unfortunately be lower, and you’ll have to pay closer to 6%.

State unemployment tax for private service professionals

Some states require that household employers pay state unemployment tax. To find out whether you’ll need to pay it, go to the U.S. Department of Labor’s website to find your state’s unemployment tax agency.

Federal and state income tax for domestic employees

You’re not legally required to withhold your employee’s income taxes, but it is very helpful for your employee. Otherwise, they’ll need to save, plan and pay their taxes separately.

Ask your employee if they want you to withhold income taxes, and if they do, ask them to fill out a W-4 (Employee’s Withholding Certificate). Give the W-4 to your payroll company, and they’ll take it from here.   

Exceptions

There are a few exceptions to these tax laws. Anyone who earns an income has to pay income tax, but some household employees don’t qualify for social security, Medicare and unemployment taxes.

Generally, you won’t need to pay those taxes on three types of workers:

1.  Your spouse.

2.  Your child, if they’re under 21.

3.  Your parent (with some exceptions, e.g., if you’re divorced or widowed and your parent is providing childcare).

There’s a fourth type of worker who is exempt from social security and Medicare taxes (but not unemployment taxes):

4.  An employee who is a minor at any point during the year — even if their birthday is January 2nd. However, if the household work is the employee’s main profession, then you will need to pay the taxes. But if the employee is a student, studying is considered their main profession.

How to file household employee taxes legally

If you don’t file these taxes properly, then you may face serious consequences, ranging from a tax underpayment penalty to a felony tax evasion conviction. If you have a payroll company, they will generally prepare and file these taxes for you. If not, it’s your responsibility to make sure the taxes are paid properly.

When you begin paying your employee, you’ll need to file for an employer identification number (EIN). After the end of the year, you or your payroll company will prepare a W-2 (Wage and Tax Statement) and a W-3 (Transmittal of Wage and Tax Statement). These statements are due by January 31.

If you pay or withhold any federal taxes, you’ll need to file a Schedule H (Household Employment Taxes). For most principals, you can just attach it to your individual income tax return (Form 1040).

Paying your staff legally is easy with our partner HomePay. They facilitate household payroll in three simple steps: 

1. Customized payroll process. Set up a pay cadence that works for you, and they’ll onboard your employees to save you time.
2. Tax returns filed automatically. They prepare your quarterly and year-end taxes – filed on-time, every time. Guaranteed.
3. Unlimited access to experts. Contact their award-winning tax, payroll & HR specialists to have your questions answered quickly and accurately. 

That’s it! Get started today.