Year after year, the question of what taxes must be paid for people who are paid to perform services for a household is a vexing one.
After all, so-called “nanny taxes” potentially include several other types of workers, such as gardeners, cleaners, or health care aids. And the question of whether these workers are properly classified as independent contractors or as household employees is a tricky one.
In this two-part post, then, we will discuss tax compliance for household employers.
In determining whether someone is an employee, the key issue is control. Does the person you hired have control over the work? As the IRS explains in Publication 956, this does not only refer to what gets done. It also refers to how it gets done.
In other words, the more specific instructions you provide about how the person you hire does the work, the more it looks like an employment relationship.
If the worker is classified as an employee, and you pay more than a certain amount in wages, you will have to pay employment taxes on the workers’ wages. More specifically, you will have to pay Social Security and Medicare taxes (the employer’s share of those, that is). You will also be required to withhold a certain percentage of the employee’s wages for Social Security and Medicare taxes.
The wage threshold at which these requirements come into play for a household employee is $1,900 per year. So if your only household employee is a very occasional babysitter, you will probably not be subject to employment taxes. But for other workers, you may be surprised at how quickly you can reach the $1,900 threshold.
And on the high end — for household employees who are paid more than $200,000 – there is also an employer requirement to withhold Additional Medicare Tax.
As Kelly Phillips-Erb recently pointed out in Forbes, there are also several exceptions to be aware of regarding employment taxes for household workers. We will discuss those in part two of this post.