If you hire a household employee to provide services in or around your home, you probably have a tax liability that you don’t know about. Or maybe you have one that you do know about but are ignoring. Either situation can come back to bite you. When the worker is your employee, your liability includes both withholding and paying payroll taxes. You should also issue a W-2 after the close of the year. Sure, it is a lot easier to simply pay your worker in cash so as to avoid federal and state payroll taxes – and all the paperwork that goes with them. Your domestic worker will likely be fully cooperative with a cash deal. This allows he or she to also avoid paying taxes. However, if the IRS or your state employment department finds out about these payments, the result could be very unpleasant. Fiducial has the information you need to know to correctly deal with payroll taxes for household employees. Read on! Who qualifies as a household employee? Not everyone who performs services in or around your home is classified as an employee. For instance, a plumber or electrician who makes repairs in your home will generally be a licensed contractor. The government does not classify contractors as employees.
How you should treat a household employee for tax purposes
Some individuals try to circumvent the payroll issue by treating a household employee as an independent contractor. They incorrectly issue the household employee a Form 1099-MISC.
Here are the correct actions you should take for domestic employees:
Obtain a Federal Employer Identification Number (FEIN), which you will use in lieu of your Social Security Number when filing the required reporting forms. Note: If, as the owner of a sole proprietorship business, you already have a FEIN, you should use that number instead of requesting a separate one as a household employer.
Obtain a state ID number for unemployment insurance and state tax withholdings.
Withhold Social Security and Medicare taxes from the household employee’s pay if it exceeds the annual threshold $2,200 for 2020.
Withhold income tax from the employee if the worker requests and if you agree to do so.
File state employment tax returns as required – generally quarterly (although beware that some states require monthly returns) – and make the required deposits for state employment taxes.
Prepare a W-2 for the employee and a W-3 transmittal; file them by the end of January.
File Schedule H with your federal individual income tax return, and pay all the federal payroll and withholding taxes (i.e., the federal taxes that you withheld from the employee’s pay, plus your matching share of Social Security, Medicare and federal unemployment taxes). Limited exception: If you operate a sole proprietorship with employees, you may include the payroll taxes of your household employee(s) with those of the business’s employees, but you cannot take a business deduction for those taxes. Generally, it is better to keep the personal and business reporting separate.