You may be familiar with the “nanny tax,” but did you know that even if you do not employ a nanny, it can still apply to you? If you hire a house cleaner, gardener, or any individual that may be considered a household employee, you may have tax and reporting obligations on the federal and state level.
2023 and 2024 thresholds
If you pay cash wages of $2,600 or more for 2023 ($2,700 in 2024) to any one household employee, you generally must withhold 6.2% of social security and 1.45% of Medicare taxes (for a total of 7.65%) from all cash wages you pay to that employee, unless you prefer to pay your employee’s share of social security and Medicare taxes from your own funds. If you meet the threshold requirement, all wages are subject to FICA taxes. One exception is if the worker is under the age of 18 and this is not his or her principal occupation, you are not required to withhold FICA taxes. You must also pay your share of social security and Medicare taxes, which is also 7.65% of cash wages (cash wages include wages you pay by check, money order, etc.).
As stated above, both the employer and the worker may face FICA tax obligations. As the employer, you are held liable for either withholding your employee’s FICA share, or paying it on their behalf. In addition, you are required to pay the employer matching amount.
If you choose to pay your worker’s share of Social Security and Medicare taxes, your payments are treated as additional income to the worker for federal and state income tax purposes, so you would be required to include them as wages in Box 1 and Box 16 on the W-2 form provided.
You are not required to withhold federal or state income taxes from a household employee’s pay, but the worker can choose to have the federal or state income tax withheld. In this instance, the worker will need to fill out a Form W-4 so you can determine the correct tax amount to withhold. You could also be required to pay federal unemployment (FUTA) tax and state unemployment tax (SUTA).
FUTA taxes are required if you pay $1,000 or more in cash wages to your household worker in a calendar year. FUTA taxes apply to the first $7,000 of wages paid and the employer is solely responsible to pay this tax. The FUTA tax rate is impacted by the amount of SUTA tax paid. SUTA rules regarding household employees vary by state.
If you meet the household employee threshold requirements, then you are also required to issue Form W-2 to your employees. An employer identification number (EIN), which is not to be confused with your Social Security number, is required for the W-2s. File Form SS-4 or apply online with the IRS to receive an employer identification number.
Unless you own your own business, employment taxes for a household employee are reported on your individual tax return (Form 1040) on Schedule H using your employer identification number. To avoid penalties and interest, your household worker tax obligations can be paid by increasing your quarterly estimated tax payments or increasing withholdings from your own wages – instead of making an annual lump-sum payment when you file your tax return.
If you own your own business, you should include the taxes for a household worker on the FUTA and FICA forms (940 and 941) that are filed for your business and use your business EIN to report and pay the taxes.
Retain tax records for at least four years from the later of the due date of the return or the date the tax was paid. Household employee tax records should include the worker’s name, address, Social Security number, employment dates, check dates, the amount of wages paid and taxes withheld, and copies of forms filed.
Suttle & Stalnaker is ready to help you. If you would like more information on how this applies to you, contact our office at 304.343.4126.