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01 / 18 / 2021 by Greg Freyman, CPA in General, News & Press, Personal Tax

Household Employment Taxes

 

The household employment tax typically applies to nannies, but it may apply to any household worker who fulfills a certain number of hours working for your employ.

A household worker would be a worker you hired and not a worker temp service that you pay, as in the service delivers the nanny and the service issues the nanny with the W2 and takes care of the payroll aspect for you. This situation speaks of when you independently hire a household worker.

What typically happens is that a nanny or other household worker will receive payment “under the table” and does not report the wages earned on their income taxes as they receive no W2.

In the nanny case, once the wages go unreported, the government authorities may not collect the taxes, the parents lose out on any dependent care tax credits, and the worker will not collect any social security or medicare benefits for the services performed.

The right way to handle this situation is to do the following:

1) Register as a household employer with the IRS and the state to receive an IRS household employer tax identification number and an employer registration number with the state. Gather all pertinent documentation from your employee as you would with any other employee.

Documents like proof of identification, payroll withholding forms, and voided checks would all be examples of documents to gather and retain on the employee file.

2) Use a payroll processor specializing in household employment to process the regular pay so that a W2 is issued at yearend and the payroll tax forms are filed with the state tax authority ONLY.

3) Remit the federal employee income and payroll taxes and the employer payroll taxes along with your federal estimated income taxes quarterly or as frequently as you wish via the EFTPS site.

4) File Schedule H with your annual personal income tax return.

5) Claim any dependent care tax credits if they apply to your situation. If your worker is a home health aid, consider reflecting the medical costs (and payroll taxes) as a deduction on IRS Schedule A as a medical itemized deduction.

As always, speak with your tax professional to ensure that the situation you are facing is described above and to ensure that you are in full compliance with labor and tax laws.

Freyman CPA

 

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