Anyone, who performs specific duties for you in your home, following your instructions and using the equipment provided by you for them to use, this makes he/she your household employee. Anyone who follows instructions from an agency or offers services through their own small business is not a household employee. You have no tax liability to the IRS for them. But in the case of a household employee, you do.
First thing you need to make sure when hiring a household employee is that they are legally able to work in the US. It is required by law to fill out form I-9 from the Immigration and Naturalization service for every household employee. This form has two parts, employee and employer section. Using the proper documentation provided by your employee that proves that he/she is legally able to work in the US you should fill out the employer section. This form doesn’t need to be submitted to anyone but should be kept in your records because a government official can ask for it anytime. This form can be obtained by calling 1-800-870-3676. You also need to make sure if you have to pay state unemployment taxes for your household employee.
As an employer of a household employee, you also have to pay and withhold Social security and Medicare taxes plus Federal unemployment tax. Both of you, the employer and the employee, need to withhold 6.2% for Social Security taxes and 1.45% for Medicare taxes from the employee’s wages. You as the employee are responsible for paying these taxes to the government. You can withhold them from the employee’s wages or pay them out of your pocket. Note anything under $1200 in cash wages regardless of when it was earned is not subject to Social Security and Medicare taxes in 2000 plus if the person providing the service is under the age of 18 years and is a student regardless of the amount earned it’s not subject to Social Security and Medicare taxes. Cash wages are checks or money orders to pay the household employee. They don’t include any non-cash gifts like clothing or food. Lodging is also not included in the wages. For e.g. if someone lives with you to care for your child those expenses are not counted in the cash wages. Any allowances or reimbursement for traveling to your home are also not included.
If you pay wages to your spouse or your child or your parent for services, you don’t owe any taxes on them even if the wages are over $1200. The only exceptions to that rule according to the IRS are, " your parent cares for your child who lives with you and either is under age 18 or has a physical or mental condition that requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter and/or you are divorced and have not remarried, or you are a widow or widower, or you are living with a spouse whose physical or mental condition prevents him or her from caring for your child for at least 4 continuous weeks in a calendar quarter."
The cutoff point for Social Security taxes is $76,200 in a year paid to a household employee. Any wages earned after this amount are free of Social Security tax but you and the employee still have to pay Medicare tax on them. See the table here for how much you need to withhold the employee’s share of taxes for 2000 depending on the wages you pay them.
If you decide not to withhold them from the employee’s pay and pay the taxes out of your own pocket then when you report the employee’s wages at the end of the year, you must include the taxes you paid out of your own pocket in the employee’s wages. On every hundred dollars, the Social Security and Medicare tax is $7.65. If you are not going to take out the $7.65 from every hundred you pay to your employee, that $7.65 needs to be added to the employee’s wages for income tax purposes at the end of the year. That $100 becomes $107.65 for income tax purposes.
The Federal Unemployment Tax for 2000 is 6.2%, but you can get a credit up to 5.4% of the taxes you pay. You qualify for this by making all the contributions for the year 2000 by April 16, 2001. There is a 10% penalty on the credit you can receive if you pay it after April 16th. The employee qualifies for this by earning more than $1000 in a calendar quarter of 2000. The FUTA is owed on the first $7000 earned by your household employee in one calendar year. Any wages paid to your child under the age of 21, your spouse, and your parents don’t qualify for FUTA.
You don’t usually have to withhold Federal Income tax from your employee’s wages unless of course he/she asks you too. First the employee has to fill out W-4, Employee’s withholding allowance certificate and give it to you. You will be liable just like for Social Security and Medicare tax and FUTA for paying it to the IRS. You can do this by filing out Schedule H of form 1040, Household Employment Taxes. The Federal Income tax is based on cash wages of the employee. To compute these taxes you should build up a good record keeping habit. You should keep track of all the cash wages and non-cash wages you have paid out to your employees. Any social security and Medicare taxes withheld or that you paid out of your pocket, any federal income tax withheld any advance earned income tax payments made, and any state unemployment taxes withheld.
After calculating all the taxes you have paid out on the Schedule H add them to your income tax. If you come up with any taxes that are due to the IRS, pay them by April 16th, 2001 to avoid any penalties. You should also have an Employer Identification Number. If you don’t have it get it by filing form SS-4. You also need to file a form W-2, Wage and Tax Statement, for each household employee that you have to withhold and pay Social Security and Medicare taxes for plus if you withhold federal income tax from their wages. Need to file form W-2 by the end of January 2001 and distribute copies B, C, and 2 to your employees. You need to file form W-3, Transmittal of Wage and Tax Statements, with Copy A of form W-2 to the Social Security Administration by February 28th, 2001. If you file the forms electronically, you have until April 2nd, 2001.
