Have you hired a house cleaner, nanny, babysitter, home health care aide, or other household worker? You may be on the hook for federal and state payroll taxes if you paid a household employee more than $2,600 in 2023 ($2,700 in 2024). These taxes are commonly referred to as the “nanny tax”, which is the employer’s share of a household worker’s Social Security and Medicare taxes, as well as federal unemployment taxes.
Who is a household employee?
A household employee is someone you hire to do work in or around your home. If you control what type of work is done and how it is conducted, the worker likely qualifies as your employee. Some common household employees include:
- Caretakers and home health aides
- Butlers and cooks
- House cleaners
Exceptions to those considered household employees are:
- Your spouse
- Your parent (with certain exceptions)
- Minors under the age of 18 that are students.
Self-employed contractors you hire, such as plumbers and electricians are not considered household employees. These contractors use their own tools and equipment and offer their services to the public.
What taxes are owed for a household employee?
FICA: As an employer, you are responsible for withholding your employee’s share of social security (6.2%) and Medicare (1.45%) tax (FICA). You are also responsible for paying an equal matching amount of FICA tax. Social security taxes are due on wages up to $160,200 for 2023 ($168,600 for 2024). Medicare taxes are due on all wages paid. You may elect to pay the employee’s portion of FICA taxes on their behalf instead of withholding these taxes from their paycheck.
FUTA: You also have an obligation to pay federal unemployment tax (FUTA) if a total of $1,000 or more in wages is paid to your household employee(s) in any calendar quarter of the current or past year. The FUTA tax rate is 6.00% of the first $7,000 of wages and is paid by the employer, not the employee (do not withhold from employee’s wages). You may receive a credit of 5.40% on this amount if you also pay unemployment insurance taxes to your state.
SUI: Depending on your state, you may have an additional obligation to pay state unemployment insurance taxes. For North Carolina, if you pay a total of $1,000 or more in wages to your household employee(s) in any calendar quarter, you are liable for state unemployment insurance tax (SUI). The rate is 1.00% for new employers for the first $29,600 of wages per employee for 2023. This rate may vary if you have previously employed household workers.
Reporting and Paying
Taxes withheld from employees and the employer’s portion of taxes are reported and paid on your individual tax return (Form 1040) by filing a Schedule H. To avoid an underpayment penalty of estimated taxes, you may need to remit these payroll taxes quarterly throughout the year. You should include your employer identification number (EIN) on the Schedule H. An EIN is different from your social security number and is obtained by filing Form SS-4 with the IRS.
You are also required to provide your household employee(s) with a Form W-2, which must be filed with the Social Security Administration. Your EIN must be included on the form W-2.
You should maintain payroll records just like any other employer when you have household employees. These records should be kept for at least four years from the later of the due date of the return or the date when the tax was paid. Records should include: employee name; address; social security number; dates of employment; dates and amount of wages paid; dates and amounts of withheld FICA or income taxes; amount of FICA taxes paid by you on behalf of your household employee; dates and amounts of any deposits of FICA, FUTA, SUTA or income taxes; and copies of all forms filed.
You should also make sure your employee can legally work in the United States. Both you and your employee must complete Form I-9, “Employment Eligibility Verification,” no later than the first day of work.
Contact the professionals at Gilliam Bell Moser for more information.