When the time comes and you decide to hire someone to work for you as a housekeeper, nanny, caregiver, or similar job at your home, it’s vital that you understand the tax implications associated with such arrangements. While some people who are employers in these situations don’t pay attention to the tax side of things, this is a mistake that may lead to stiff penalties from the IRS. Rather than create this situation for yourself, here is what you need to know when hiring household help.
Employee or Self-Employed?
To begin with, you should determine whether the person who will be working in your home is legally defined as an employee or as a self-employed individual. In general, if the worker you hire controls how their work is done or is provided to you by an agency, yet still has control over how the work is done, they are not your employee. However, if you hire someone and still maintain control over their daily actions while on the job, you more than likely have yourself an employee in the eyes of the IRS.
Providing Equipment and Supplies
Along with the question of who maintains control over the job duties, determining who provides various equipment and supplies also makes a difference. As an example, if you hire a person to be a nanny and perform light housework, who follows your specific instructions about their duties and uses equipment and supplies you provide, they may be considered to be your employee. However, if you hire someone to perform lawn care services who uses their own equipment and supplies, they are probably not your employee.
Employment Eligibility Verification
Whether you hire an employee temporarily, have them live-in at your home, or they work for you on a long-term live-out basis, you are responsible for verifying they are either a U.S. citizen or an alien who is legally allowed to work in the United States (unless you hire through an agency). To do so, you and your worker must complete Form I-9, USCIS Employment Eligibility Verification. Once your worker fills out their part of the form and you verify their documents, you complete the employer part of the form. Upon doing so, do not send the form to USCIS. Instead, keep it for your records.
Severe Consequences
While Form I-9 may not sound terribly important to you, it is, in fact very important. Under U.S. law, it is illegal for any person or company to knowingly hire or continue to employ any person who is not legally authorized to work in the United States. If you do so and are caught by authorities, you could face severe penalties from the IRS and possibly even face criminal charges.
Employment Taxes
When you have any type of household employee, you may be required to withhold both Medicare and Social Security taxes, as well as federal unemployment taxes. Under current regulations, if you paid your employee cash wages exceeding $2,200 in 2020, you are required to withhold and pay Medicare and Social Security taxes. In addition, if you paid at least $1,000 in cash wages to your employee during any quarter of the calendar year in either 2019 or 2020, you are required to also pay the federal unemployment tax. Should none of these apply to you, it is possible you may still be required to pay state unemployment taxes. Consult with your CPA for details.
Social Security and Medicare Taxes
As for Social Security and Medicare taxes, you as an employer are required to pay in not only your share as the employer, but also your employee's share of the taxes. Currently, as the employer, your share totals 7.65 percent, which is broken down into 6.2 for Social Security and 1.45 for Medicare. The amount is the same for your employee, so keep this in mind when paying the taxes. While you have the option of either withholding your employee's share from their wages or paying it directly out of your own funds, you should not count wages you pay to your spouse, your parent, or any child you have who is under age 21 as Social Security and Medicare wages.
Exceptions to the Rule
As with many tax-related matters, there are of course exceptions to the rule regarding the payment of Social Security and Medicare taxes with regard to payments made to a parent or an employee who is under age 18 at some point during the course of the year. Regarding a parent, these wages should be counted if they care for your child and the child is under age 18 or suffers from a physical or mental condition requiring personal care from an adult. In addition, you can only count these wages if you are divorced and have yet to remarry, are widowed or a widower, or are married but have a spouse whose mental or physical condition prevents them from providing childcare. As for employees less than 18 years of age, wages should only be counted if this job is their primary occupation, which would not be considered the case if the person you employ is a student.
Maximum Taxable Earnings
Should the Social Security and Medicare wages of your employee reach $137,700 during 2020, any wages paid the remainder of the year should not be counted as Social Security wages when figuring the Social Security tax. However, wages should continue to be counted toward the figuring of Medicare taxes. Also, be aware that meals and lodging provided by you at your home to your employee for your convenience and as a condition of their employment are never counted as wages in these situations.
Needless to say, the tax issues involved when hiring household help can be complex and confusing. To make sure you don’t make costly mistakes along the way, it is best to consult with a CPA who can advise you on how to proceed in these matters. In doing so, both you and your employees or contract workers can have peace of mind.