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Balancing work and child rearing is challenging enough. But if you get outside help for these chores, you’ll also have to decipher the complexities of tax and labor law.
Bankrate's 2010 Tax Guide
This is exactly the situation faced by many Americans who pay for child care. And if this helper regularly comes to you, rather than you dropping Jimmy and Susie off at a day care center, then you’ll likely pay Uncle Sam as well as your nanny.
Although it’s popularly referred to as the “nanny tax,” any household help — including a gardener, private nurse or maid — is going to cost you more than salaries. In most cases, you also have to pay employment taxes for domestic workers.
Correctly complying with the rules is important not only to your employees, but also to your own tax bottom line. Household employment taxes are folded into your personal income tax return, so you need to keep track and figure them accurately. If you don’t, it could cost you even more.
Tax types and limits
There are two separate employment taxes to consider. Whether you’re responsible for either hinges on the amount you pay and how much control you have over the way the job is done.
First is FICA, the Federal Insurance Contributions Act amount that almost every wage earner sees taken out of his or her paycheck. This tax money goes to pay for the worker’s future Social Security and Medicare distributions.
If you paid a household employee $1,700 or more in 2009, you must pay FICA taxes for that person. (The 2010 earnings threshold remains at that level.) This 15.3 percent tax generally is split equally between the worker and boss, with each paying 6.2 percent of income toward Social Security, plus 1.45 percent for Medicare.
Then there is the Federal Unemployment Tax Act, or FUTA, payment that covers unemployment compensation to workers who lose their jobs.
The unemployment tax is paid only by the employer. It’s required if your total household salaries are $1,000 or more in any calendar quarter. You generally must pay unemployment tax on the first $7,000 of wages you pay each household employee.
The unemployment tax is 6.2 percent of your employee’s FUTA wages. However, you may be able to take a credit of up to 5.4 percent, effectively making your employer tax payment just 0.8 percent. To take the full credit on your 2009 return, you must make all of that year’s required contributions to your state unemployment fund by April 15. The credit is reduced of payments made after that date.
State taxes, too
Don’t forget about state obligations. You also might need to pay state unemployment taxes. Check with your state’s unemployment tax agency; a list of offices is included in IRS Publication 926, Household Employer’s Tax Guide.
Many states also require you to pay for workers’ compensation in case your employee is injured on the job.
Who’s the boss?
What you pay your help isn’t the only consideration when it comes to employment taxes. The control factor is just as important.
A household worker is your employee if you directly manage not only what work is done, according to the Internal Revenue Service, but also how it is done. It doesn’t matter if the worker is full time or part time or whether you pay on an hourly, daily or weekly basis or by the job. If you are in charge of job particulars, the IRS deems you in control and you must pay the appropriate taxes.
If you hire a gardener who comes a couple times a month and he’s subject to your control as far as hours and how he works, he’s your employee. But a landscaper who holds himself out as in business and who takes care of your yard and several others is self-employed, freeing you from the obligation to pay his employment taxes.
Similarly, if you hire a maid who sets her own schedule and uses her own supplies, that’s another case of independent contracting. But if you hire a housekeeper who provides cleaning services exclusively for you, using materials you provide at a time and in a manner you determine, says Enrolled Agent and National Association of Tax Professionals Research Coordinator Cindy Hockenberry, you are in charge and must pay the taxes.
The amount of control is most easily identifiable in cases of personalized in-home care, either of children or for ailing dependents who need nursing help.
And while there may be some leeway in determining a worker’s status, Hockenberry cautions against going overboard to make an employee look like an independent contractor just to escape employment taxes.
The employment definition may depend on facts and circumstance that can be altered to fit the needs of the worker or employer, but the IRS takes the differentiations very seriously — enough to print Publication 15-A, Employer’s Supplemental Tax Guide. This 70-page booklet provides household employers with additional guidance on the various employer-employee relationships and tax rules.
Paying federal employment taxes
Once you’ve resigned yourself to paying employment taxes for household help, how exactly do you get the money to the IRS?
Previously, individuals who hired home workers had to file quarterly tax paperwork just like a business. But lawmakers found that such complexity produced a major tax collection headache for the IRS.
“Because the rules were so complicated, no one ever paid,” says Hockenberry. “So they tried to make it simple and developed Schedule H to attach to your regular 1040 when you normally pay taxes.”
But to file Schedule H, you first have to get a second tax ID number. The IRS wants your employer identification number, or EIN, as well as your Social Security number on the form. You should apply for an EIN as soon as you hire any household help by filing Form SS-4.
When you’ve filled in all the ID numbers, as well as the particulars of your domestic help’s salary, Social Security and Medicare taxes due and any unemployment taxes you may owe, you transfer the amount to line 59 in the “other taxes” section of your individual Form 1040. Be sure to check the “Household employment taxes” box. This section is added to your income tax liability to get the total amount of tax you owe.
Don’t get caught short
And because the employment taxes are filed as part of your routine individual income tax return, you need to stay on top of the amount you will owe so you won’t be surprised when you figure your final tax bill in April.
If your return shows a tax of more than $1,000 due, you could owe the IRS penalties and interest for underpayment of taxes throughout the year. Because of that potential cost, household employers should consider filing estimated tax payments to cover any tax shortfall.
Or, if you have a job, you can file a revised W-4 and ask your boss to adjust your income tax withholding to make sure you pay enough taxes that way.
Remember, too, that in addition to complying with tax laws, you’ll need to follow federal and state labor laws that apply to household help.