Navigating IRS Rules on Household Employees Made Easy: A Comprehensive Guide

Managing household employees can be a rewarding experience, but it also comes with responsibilities. Particularly when it comes to understanding and complying with IRS rules. When you hire a household employee, you become an employer and are responsible for filing Schedule H and remitting payroll taxes on behalf of your employees. You may have never had to deal with these responsibilities before, so you may be wondering what to do. In this guide, we will break down the requirements for you.

Household employees defined

People who provide services at your home as independent contractors aren’t treated as household employees. The plumbers, electricians and babysitters you occasionally hire, for example, are independent contractors who take care of their own employment taxes. Household employees commonly include housekeepers, maids, nannies and babysitters, if you control which tasks they’re responsible for and how they complete them.

It essentially depends on the facts and circumstances of each situation. But if you have a nanny who comes to your home and takes care of your children five days per week, she’s more likely a household employee than the plumber you call a few times per year. Don’t count wages you pay to your spouse, your parents, your child under the age of 21, any employee under the age of 18 (See exceptions below1).

What is Schedule H

Schedule H is a form you file with your taxes if you pay a household employee $2,700 or more in cash wages to any person in a year. When you pay wages over this threshold, you are subject to payroll taxes and pay your share of Social Security (6.2%) and Medicare taxes (1.45%). If you pay $1,000 or more in any calendar quarter, you also need to remit unemployment taxes.

As an employer, you’ll withhold these tax amounts from your workers’ paycheck and report it on Schedule H. Most states also have an unemployment tax and form that will need to be remitted based on your state laws. You will need to apply for an employer’s Federal I.D. Number (FEIN) Form SS-4 FEIN Application. This number is reported on the tax forms instead of your social security number. You don’t want to hand out your SSN to every person you pay so this gives you a level of protection for your identity. You also want to open a tax account in your local state to remit your forms and taxes. For the State of Florida, click FLDOR Website.

What are my household employment tax obligations?

While employees can decline income tax withholding, it’s important to know that they don’t have a choice when it comes to Social Security and Medicare tax withholdings. As an employer, you can choose to pay those taxes for them. Any taxes owed by the employee you paid on their behalf is added back to their federal wages. To make sure you get the taxes right, here are some key steps:

  • Get a signed W-4 – This will give you all of the information you need about the employee to file accurate tax information.
  • Get a signed I-9 – As an employer, you will need to make sure your employee is eligible to work in the United States and retain this document and the required supporting documents.
  • Complete Form W-2 – If you have to withhold any Social Security and Medicare taxes, or if you withhold federal income tax, you will need to complete form W-2 for each employee and give it to them by January 31st each following year. The social security administration also receives a copy with form W-3.
  • Pay FUTA – you may be required to pay federal unemployment taxes (FUTA) on wages over $1,000. This rate is 0.6% for 2024, up to a wage base of $7,000, maximum $42
  • Pay SUTA – Check with your local taxing agency for filing deadlines
  • Estimated Taxes – Owing some of these taxes may cause your tax liability to change. Ensure you have sufficient withholdings to cover your tax liability or make estimated tax payments to prevent penalties.

 

Tax credits available

Child Tax Credit: The wages you pay to your employee can impact your eligibility for the Child Tax Credit. While the credit is subject to income limits and varies based on the number of qualifying children, understanding how your employment taxes and income factor into this credit is essential for maximizing your tax benefits.

 

Conclusion

Navigating the IRS rules on household employees doesn’t have to be overwhelming. By understanding payment thresholds, legal requirements, and filing obligations, you can ensure compliance and make the most of available tax credits. Always consult with a tax professional for personalized advice tailored to your specific situation.

  1. Exceptions include your spouse, your parent (some exceptions), those under 18 at any time during the year unless performing household work is their principal occupation (if they are a student, performing household work isn’t considered to be their principal occupation).