Figuring taxes on the wages of household employees
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Dear Tax Talk,
My wife and I are figuring out child care for our son. If we pay my sister-in-law to watch him in our home for a total of 10 (hours) to 15 hours a week, would my wife and I have to pay employment taxes?
IRS Publication 926 is the household employer’s tax guide. Basically if you pay for in-home services including babysitting or cleaning, you have a household employee. If the care or other service is given in someone else’s home, that person is not your household employee. Instead, he or she is considered self-employed.
If you expect to pay more than $1,600 in 2008 to that person, you are required to pay FICA and Medicare tax on that person’s wages. Withholding of income tax is optional. You can choose to pay the whole amount of FICA and Medicare, or you can withhold the employee’s portion from wages.
The combined FICA and Medicare tax is 15.3 percent. If you withhold it from your sister-in-law, you would withhold one half, or 7.65 percent. If you don’t withhold, then you would count the amount you pay on her behalf as additional wages, but it would not be subject again to the 15.3 percent tax.
For example, if you pay her $100 for the week, your tax obligation is $15.30. If you pay her a net pay of $92.35, then her wage for W-2 purposes is $100. If you pay her the full $100 and you absorb her tax, her W-2 would show a wage of $107.65, but you would still only owe $15.30.
The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act, or FUTA, that pays unemployment compensation to workers who lose their jobs. Like most employers, you may owe both the federal unemployment tax (the FUTA tax) and a state unemployment tax.
If you pay cash wages to all of your household employees totaling $1,000 or more in any calendar quarter of 2008, the first $7,000 of cash wages you pay to each household employee in 2008 are FUTA wages. (A calendar quarter is January through March, April through June, July through September or October through December.)
You would not count any Social Security taxes added to the employee’s wages as FUTA wages. For example, FUTA wages in the preceding example would be $100, not $107.65.
If your employee’s cash wages reach $7,000 during the year, do not figure the FUTA tax on any wages you pay that employee during the rest of the year. For example, if you pay your sister-in-law $100 every week, you will have paid her $1,300 for the quarter, so you would be liable for FUTA on all her wages up to $7,000 for the year. If in any quarter she goes below $1,000, you still owe on all her wages for all quarters up to the wage cap, as she exceeded the $1,000 threshold in one quarter.
FUTA is basically paid at the rate of 0.8 percent. The actual rate is 5.4 percent, but you receive a credit for state unemployment if you comply with state unemployment statutes (referred to as SUTA). Publication 926 has an appendix, so you can contact your state’s SUTA office.
The maximum FUTA then would be $56 per employee, which is 0.8 percent on the wage cap of $7,000. SUTA will add to that cost.
You’ll need to file Forms W-2 for your household help by January 31 of the following tax year. You’ll also need to complete Schedule H on your annual form 1040 to report the taxes owed. Depending on your state, you may have quarterly or annual SUTA reporting requirements. You should request copies of Forms W-4 and I-9 from your staff.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.