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Household Employment Taxes - Are You Compliant?

Many families hire nannies, housekeepers and other domestic employees to provide private services in their homes. Household employers may not be aware of the federal and state tax responsibilities that go along with hiring such employees. While some organizations, such as nanny placement firms include payroll and tax planning advice in their scope of services, most do not.

The following are some highlights of the requirements that household employers must address once an employee is hired:

  • Register for Federal and State Identification Numbers
  • State New Hire Reporting
  • Paycheck Calculation
  • Quarterly Tax Compliance
  • Year-End Tax Compliance

In addition to regular quarterly compliance, year-end requires additional reporting requirements as follows:

Form W-2 Wage and Tax Statement must be distributed to employees by January 31st. This statement reflects earned wages, Medicare tax and Social Security tax withheld, Federal and State wages, and withholding tax, if applicable.

Form W-3 Transmittal of Wage and Tax Statement must be submitted to the Social Security Administration by February 29th along with Copy A of Forms W-2.

Schedule H, Household Employment Taxes is submitted with employer's personal Form 1040 by April 15th. Schedule H reflects wages paid, Federal withholding taxes, FICA (Medicare and Social Security) taxes withheld and matched, and Federal Unemployment (FUTA) taxes. These tax figures are then carried over to Form 1040, increasing total tax liability for the year.

If the IRS determines that a balance owed on Form 1040 is the result of the household employment situation, a penalty may be charged. In order to absorb the total tax liability incurred throughout the year for the employee, household employers are encouraged to either increase quarterly estimated tax payments, or increase withholding tax with their employer.

It should be noted that Federal and State unemployment premiums are employer-paid benefits, and are not withheld from the employee's wages.

Also, as mentioned above, FICA withholding tax must be matched by the employer. Contributions for unemployment premiums and FICA taxes begin again each January 1st for each employee.