When you hire a nanny, you are considered a “household employer”. And the nanny – or another person performing work in or near your home, like a health aide, housekeeper, gardener, cook, personal assistant, estate manager, etc. — is considered an employee of the family. Misclassifying an employee as an “independent contractor” is viewed as tax evasion by the IRS.
If a household employee is paid more than $2,100 in a calendar year, the household employer is required to withhold and remit payroll taxes to the state and the IRS. If a household pays an employee less than the threshold in a calendar year, payroll taxes are not required to be withheld and remitted; however, the household is still legally considered an employer and, therefore, must adhere to federal and state labor laws.
In this post, we review your responsibilities as a household employer, and suggest a do-for-you solution by our partner, HomePay.
Financial and Legal Responsibilities for Household Employers
#1. Tax Withholding
Household employers are required to withhold taxes from their employee’s paycheck each pay period:
- Social Security & Medicare
- Federal Income Tax (the amount withheld is based upon the employee’s withholding selections on Form W-4)
- State Income Tax (where applicable; the amount withheld is based upon the employee’s withholding selections)
#2. Paying Taxes
- Social Security & Medicare
- Federal Unemployment Insurance
- State Unemployment Insurance (varies by state)
#3. Filing Paperwork
Household employers are required to prepare and file special year-end paperwork. In addition to providing Form W-2 to each employee, household employers are required to file Form W-2 Copy A/Form W-3 with the Social Security Administration and file Schedule H with their federal income tax return (Form 1040).
#4. Carry Workers’ Compensation
Household employers in many states are required to carry Workers’ Compensation. Workers’ compensation is not handled through the tax process. It’s an insurance policy that provides assistance with lost wages and medical expenses in the event of an injury or illness while on the job. It also protects the employer since employees who accept benefits forfeit their right to sue — regardless of fault. Whether it’s required in your situation or not, we recommend families obtain a policy to prevent them from having to cover these expenses out of pocket. For most families, as part of the HomePay setup process, we can guide you to a simple stand-alone policy through their licensed insurance partner. It’s a convenient and affordable solution.
#5. Meet Labor Law Requirements
Household employers must meet federal and state labor law requirements. Household workers are classified as non- exempt workers. As such, they must be paid overtime for all hours over 40 in a 7-day work week. The rate for overtime pay must be at least one-and-one-half times the regular rate of pay. (Note: Live-in employees in most states do not have to be paid overtime, but they must be paid for every hour they work). In some situations, it’s possible to offer a salary and include the overtime rate of pay into the salary. In some states, other labor laws such as paid time off may apply.
The Benefits of Compliance
Compliance provides three significant benefits to families and their employees:
#1. Audit & Lawsuit Prevention
Families who pay legally don’t have to worry about legal disputes levied by disgruntled former employees or IRS audits or charges of conspiring to commit tax evasion — a serious charge that carries fines up to $25,000 and potential jail time and loss of professional license. Think of it as insurance against tax and legal problems.
#2. Tax Breaks
There is a common misperception that compliance is expensive. The truth is that most families — regardless of their income level — qualify for tax breaks that offset the majority of the employer tax costs. There are two tax breaks available to families: a) Dependent Care Accounts (a.k.a. “Flexible Spending Accounts”) allow families to pay for up to $5,000 of dependent care expenses using pre-tax dollars. Depending on the marginal tax rate, this can save household employers up to $2,300 each year; b) Child or Dependent Care Tax Credit (IRS Form 2441) allows families to itemize up to $3,000 per child per year (maximum of $6,000). For most families, this tax break will yield an annual savings of $600 for one child and $1,200 for two or more children. Note: Families who have access to a Dependent Care Account and have 2 or more children may be able to capitalize on both of these tax breaks — providing a savings of up to $2,500 per year.
#3. Professional Benefits
When a family pays legally, the employee receives important short-term and long-term benefits, such as Social Security, Medicare, unemployment, healthcare subsidies, disability and an ability to obtain loans/credit. These benefits and protections have a dramatic impact on the perceived professionalism of the position and, therefore, the quality and duration of the employment relationship.
HomePay as a Solution
Since 1992, HomePay has been eliminating the work and worry for busy families by providing comprehensive management of payroll and taxes — as well as unlimited guidance and support from our team of tax and labor law experts — for a small, tax-deductible quarterly fee.
Here’s a summary of the compliance process for households — all of which HomePay handles for the clients with guaranteed accuracy and timeliness:
- Register for federal and state tax accounts
- Complete and file a New Hire Report
- Calculate the correct amount of federal and state taxes to withhold each pay period
- Track gross pay, net pay, federal and state taxes withheld, and federal and state employer taxes
- Prepare state employment tax returns quarterly and remit both employer and employee taxes
- Prepare federal tax estimates four times per year and remit both employer and employee taxes
- Prepare year-end tax forms (W-2, W-3, Schedule H and State Annual Reconciliation)
- Respond to IRS and state requests/inquiries
- Monitor ever-changing household employment tax law
The IRS estimates that the entire compliance process takes the average individual about 50-55 hours per year. Let HomePay take these tasks off your plate and eliminate all your work, worry and risk. Try it today!