A household employer pays employees to perform domestic work in or around his home. Household employees include:
babysitters and nannies
housekeepers, maids, and cleaning people
private nurses, health aides, and caretakers
groundskeepers
drivers, and
similar domestic workers.
Wages paid to a household employee are subject to social security and Medicare taxes only if the employee is paid cash wages of $1,800 or more (for 2012).
The FICA taxes are 15.3% (13.3% for 2012) of cash wages.
The employee’s share is 7.65% (5.65% for 2012), but the employer can elect to pay the employee’s share. See “Not withholding the employee’s share” in IRS Publication 926, Household Employer’s Tax Guide.
The employer’s share is 7.65%.
If the employee’s share of taxes is withheld and the employee is paid less than $1,800 for the year, any FICA taxes withheld must be refunded before Forms W-2 are processed.
Wages paid to a household employee who is under the age of 18 at any time during the year are exempt from social security and Medicare taxes for the entire year, unless providing household services is the employee’s principal occupation. If the employee is a student, providing household services is not considered his principal occupation.
Wages paid to a household employer’s spouse, child under the age of 21, or parent (see exceptions in IRS Publication 926, Household Employer’s Tax Guide) are exempt from FICA and FUTA.
A household employer who pays cash wages of $1,000 or more in any calendar quarter of 2005 or 2006 must pay federal unemployment tax.
A household employer who does not have to pay any federal unemployment taxes may still have to pay state unemployment taxes. State withholding requirements for household employees vary.
Household employers are not required to withhold federal income tax from an employee’s wages, but if the employee requests it and submits a Form W-4, the employer may withhold federal income tax. State withholding requirements for household employees vary.
Employers (except sole proprietors) report and pay employment taxes on wages paid to household employees on their personal federal income tax return, Form 1040. Schedule H is used to calculate the total employment taxes (social security, Medicare, FUTA, and withheld federal income taxes).
Household employers may have to pay an estimated tax underpayment penalty if they do not have enough federal income tax withheld from their own wages or pay estimated tax payments to cover the employment taxes for the year. To avoid a large balance due, household employers should consider increasing their federal income tax withholding or make estimated tax payments to the IRS.
An employer who is a sole proprietor can choose to pay household employment taxes with:
their federal income tax, or
with their federal employment tax deposits for the business or farm. In this case, the employment taxes are reported on Form 940, Form 941, Form 943, and Form 944.
Paychex provides Schedule H for household employers.
Refer to IRS Publication 926, Household Employer’s Tax Guide, for additional information on household employers’ tax responsibilities.
Refer to IRS Publication 505, Tax Withholding and Estimated Tax, for information on making estimated tax payments.