A Primer on Household Employees
By Garrison, Larry R | |
Proquest LLC |
Avoiding Adverse Tax Implications
The term "Nannygate" originated with
As demonstrated, the "nanny tax" has been a recurring theme around appointees for public office; however, it also applies to the average citizen who hires household help. The most common tax problem related to household employees is the nonpayment of income,
Types of Household Employees
A household employee is generally defined as someone hired by an individual taxpayer to do household work. Common household workers include babysitters, nannies, housekeepers, maids, private nurses, and gardeners. A worker is generally classified as an employee if the taxpayer controls not only the work that is done, but how the work is done. If a worker is not an employee, then the worker is self-employed and considered an independent contractor.
Workers classified as independent contractors pay their own
Legality of household employees. An employer must determine the legality of the household employee to work in
Payment of Employment Taxes
Certain employment taxes might have to be withheld from a worker's compensation-for example,
Social Securily and Medicare Taxes
Along with the regular
The employer is responsible for payment of both the employer's and employee's
If a household worker earns cash wages for 2013 of
Noncash wages-including the value of food, lodging, clothing, or any other noncash item given to an employee-are not considered
Certain wages are not included in the definition of
* Wages paid to the employer's spouse
* Wages paid to the employer's child under the age of 21
* Wages paid to the employer's parent, except if-
* the parent cares for the employer's child, who is either under the age of 18 or has a physical or mental condition that requires the personal care of an adult for at least four continuous weeks in a calendar quarter, or
* the employer's marital status is divorced and not remarried, a widow or widower, or living with a spouse whose physical or mental condition prevents him from caring for the employer's child for at least four continuous weeks in a calendar quarter
* Wages paid to an employee who is younger than age 18 at any time during the year, except if providing household services is the employee's principal occupation. If the employee is a student, providing household services is not considered to be the principal occupation.
Withholding limit There is a withholding limit for
Federal Unemployment Tax
The federal unemployment tax was enacted as part of the Federal Unemployment Tax Act (FUTA). It works in conjunction with state programs and pays unemployment compensation to workers who have become unemployed. Federal unemployment taxes and state unemployment taxes are not withheld from a worker's wages, but are paid out from an employer's funds.
The federal unemployment tax rate for 2013 is 6.0% of the employee's FUTA wages. A credit is generally available for up to 5.4%, so the net tax rate is 0.6%. The credit against the federal unemployment tax is available to employers paying state unemployment taxes. Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, is used to compute the correct federal unemployment tax due.
The first
Federal Income Tax Withholding
Employers are not required to withhold federal income tax from wages paid to household employees, but a household employee may request that federal income tax be withheld. Household employees making this request must give their employer a Form W-4, Employee's Withholding Allowance Certificate.
The employer must then refer to
An employer can pay the employee's federal income taxes that would normally be withheld from the employer's funds. If an employer decides to pay the employee's federal income tax that would normally be withheld, these taxes must be included in the employee's wages for income tax,
Wages subject to withholding. Wages subject to federal income tax withholding include both cash and noncash wages. Noncash wages are included at the fair market value of the noncash wage.
Meals provided to an employee at the employer's home for the employer's convenience do not constitute wages subject to withholding; neither does lodging provided at the employer's home for the employer's convenience and as a condition of employment.
Earned income credit (EIC). The EIC assists low-income taxpayers by allowing them to receive a payment from the
If a Copy B of Form W-2 is not utilized, then notice must be given to the worker using one of the following:
* A substitute Form W-2 with the same EIC information on the back of the employee's copy that is on Copy B
* Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC)
* A written statement with the same wording as Notice 797.
Making Tax Payments
Schedule H (Form 1040) is used to compute
Employers can pay the taxes during the year by-
* requesting their employer withhold additional federal income taxes from their wages,
* requesting the payer of their pension or annuity to withhold additional federal income taxes, or
* making estimated tax payments to the
Payment option for businesses and farms. Employers who also operates a trade or business or farm as a sole proprietor may include the employee and employer's share of employment taxes for their household workers with their employment taxes withheld and paid for their business or farm employees.
The employment taxes taken as a deduction on either Schedule C (Profit or Loss from Business) or Schedule F (Profit or Loss from Farming) would not include any wages and employment taxes for household employees.
Applicable Forms
A household employee's wages and withholdings need to be reported to the
Form SS-4. Employment tax forms ask for a nine-digit employer identification number (EIN). This is a different from the employer's
Form W-2. Each household worker must be given a Form W-2 if the following conditions are met:
* The employee was paid
* The employee was paid wages that had federal income tax withheld.
Copy A of Form W-2 is sent to the
Employees may request a Form W-2 at the time they terminate employment. This form must be given to the employee within 30 days of the request or when she leaves the employer.
Schedule H. Schedule H is used to report employment taxes if the household worker is paid the following:
*
* FUTA wages
* Wages from which the employer withheld federal income taxes.
Schedule H is filed with the employer's federal income tax return; however, if the employer is not required to file a federal income tax return, the employer can-
* file Schedule H without an attached federal income tax return, or
* include the employment taxes for the household worker with other employees on Form 941, Employer's Quarterly Federal Tax Return; Form 944, Employer's Annual Federal Tax Return; Form 943, Employer's Annual Federal Tax Return for Agricultural Employees; or Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, whichever are applicable.
Various business employment tax returns. Similar to the second option noted above for nonfederal tax return filers, an employer can pay employment taxes for a household worker along with the employer's business or farm employment taxes and not file a Schedule H. Under this option,
Amending Schedule H. If an error is made on Schedule H, the process for amending it depends upon whether Schedule H was filed with other tax forms or as a stand-alone return. Form 1040X, Amended U.S. Individual Income Tax Return, is filed with a corrected Schedule H attached if Schedule H was previously filed with a Form 1040. If an error is discovered on a Schedule H that was filed as a stand-alone return, a corrected Schedule H is filed with "CORRECTED" and the date the error was found written on the top of the form.
If an underpayment of
An overpayment of
Procedures for Adjustments and Refund Claims for Overpayments
For a corrected Schedule H filed with a Form 1040X, the corrected return is adjusted by showing on line 22 of the Form 1040X that the overpayment is to be applied to the estimated taxes on Form 1040 for the year in which the corrected Schedule H is being filed. For a corrected Schedule H that was initially filed as a stand-alone return, "ADJUSTED" should be written on the top of the form. Interest is not paid on overpayments on adjusted returns. Overpayments of FUTA taxes may not be adjusted on a return. If a corrected Schedule H for an overpayment is filed within 90 days of the expiration of the period of limitations, only a claim for refund can be filed.
For a corrected Schedule H filed with a Form 1040X, the claim for refund is indicated on line 21. For a corrected Schedule H that was initially filed as a stand-alone return, the claim for refund is indicated by writing "REFUND" on the top of the form Interest is paid for any refund overpayment. Overpaid FUTA taxes are not refunded, but credits for state contributions are increased by foe amount of the overpayment.
Taxpayer Penalties
Failure to report employment taxes for household workers can result in both fines and imprisonment. Internal Revenue Code (IRC) section 7201 states that any taxpayer who willfully attempts to evade a tax can be found guilty of a felony and fined up to
The employment of a worker who is not authorized to work in
Child and Dependent Care Credit
A federal tax credit is available to employers who incur employment-related child and dependent care expenses. These expenses must be incurred to enable the employer of the household worker to work or to seek employment. To be eligible, the employer must have either a dependent younger than age 13 or a dependent or spouse who is physically or mentally incapacitated and lives with the employer for more than six months of the year.
The expenses that are eligible for the tax credit include expenses incurred for household services and for the care of the qualifying individuals incurred to enable the employer to work. Both in-home and outof-home expenses are eligible for the credit. Child or dependent care expenses paid to a relative are eligible for the credit, unless the relative is a child younger than age 19. The maximum amount of employment-related expenses eligible for the credit is
The credit is subject to an earned income limit; eligible expenses cannot exceed the applicable limit. If the employer is married, foe earned income limitation applies to the spouse with the lesser earned income. A "deemed" income is assigned to nonworking spouses who are physically or mentally disabled or are full-time students (enrolled fulltime at an educational institution during five calendar months out of the year). The amount of deemed income is
The credit percentage is on a sliding scale from 20% to 35%, depending on the employer's adjusted gross income (AGI). The maximum credit of 35% applies to AGIs of
The child and dependent care credit is computed and reported with the employer's tax return using Form 2441, Credit for Child and Dependent Care Expenses (see
Recordkeeping
Of course, records must be maintained to show all of the information related to the household worker necessary to support the wages reported and any withholding. Records should be kept showing the worker's name, address, and
All workers must have a
State Laws
In addition to state employment taxes, state law might require an employer to enroll in the workers' compensation plan. In addition, an employer might be required to obtain disability insurance for a household employee. Of course, employers should review their homeowner's insurance policy with respect to coverage for household workers.
No Small Matter
The average taxpayer is probably unaware of the tax and penalty consequences of hiring a household worker. But tax preparers and advisors must be aware of the tax aspects for domestic workers. The various tax and penalty issues discussed above need to be recognized and addressed whenever a taxpayer hires household help. While the taxpayer might see the amounts involved as insignificant, even a small amount of wages can be subject to a variety of taxes.
Employment tax records should be kept for at least four years.
Copyright: | (c) 2013 New York State Society of Certified Public Accountants |
Wordcount: | 3973 |
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