Do you have a domestic worker such as a nanny, a caregiver for an elderly relative who has moved in with you, or a housekeeper? You may have hired someone to help you in difficult circumstances caused by the pandemic. Maybe this has become a permanent arrangement.
In these scenarios, the dreaded nanny tax issue may be at stake for work done in the recent past or for work still in progress.
Nanny tax refers to your obligation to withhold and deposit a domestic employee’s share of Social Security and Medicare taxes from the wages paid to the employee and also deposit the employee’s share. the employer of these taxes. Employee and employer shares of social security and health insurance taxes are collectively referred to as the FICA tax.
You may also owe Federal Unemployment Tax (FUTA) on wages paid to a domestic worker.
Finally, you may need to withhold and file state income tax on wages paid to a domestic worker, and you may also need to pay state unemployment insurance.
Here is, in FAQ format, what you need to know about federal tax matters for domestic workers. For anything related to the state, you’ll need to contact your friendly neighborhood payroll or tax professional.
Do you really have a domestic worker?
Good question. The Nanny Tax issues covered here only apply if a domestic worker is in fact your employee – as opposed to an independent contractor – under federal tax rules.
Domestic work defined
First, let’s clarify who can potentially count as a domestic worker. According to IRS publication 926 (Household Employers’ Tax Guide), domestic workers perform housework – such as a babysitter, a butler, a caretaker, a cook, a driver, a health worker, a maid. housekeeper, a maid, a nanny or a private nurse. Housework includes only the provision of services in or around your private home.
Services provided at your home that are not of a domestic nature, such as those provided by a private secretary, a personal assistant who does not perform household chores, a tutor or a librarian, are not considered housework. However, a person who provides these types of services may be a gardening employee as opposed to a domestic worker.
The basic tax rules for employees of garden varieties are similar to those for domestic workers, but there are different compliance requirements. Consult a tax professional if you have any questions.
House worker set
According to IRS publication 926, a person who does housework for you is your employee if you are in control not only of the work being done, but also how the work is done. So, if a worker comes to your home regularly on a schedule that you dictate and is supervised by you, the worker is probably an employee. It doesn’t matter if the job is full-time or part-time or if you hired the worker through an agency. However, if an agency provides the worker and controls what work is done and how it is done, the worker is not your employee.
Yard attendants, pool service guys, housekeepers and others who provide services to the general public and regularly come to your house to go about their business are not your employees.
If I have a domestic worker, what are my FICA tax obligations?
For 2021, the FICA tax problem arises if you pay a domestic worker $ 2,300 or more during the year. If you exceed this threshold, the Social Security tax rate is 12.4% on all cash wages up to $ 142,800. You withhold 6.2% of the employee’s salary and pay the remaining 6.2% out of your own pocket as an employer. The Medicare tax rate is 2.9% on all cash wages. You withhold 1.45% of the employee’s salary and pay the other 1.45% out of your own pocket as an employer.
Finally, you must withhold the additional 0.9% tax on wages paid to a domestic worker over $ 200,000 and file this tax with the federal government. But you won’t have to worry about that unless you’re one of the greatest employers ever.
Exception: The FICA tax does not affect wages paid to a domestic worker under the age of 18 at any time of the year – unless providing household services is the employee’s primary occupation. If the employee is a student, providing household services is not considered a main activity, so no FICA tax issue in this case.
What are my FUTA obligations?
For 2021, you owe FUTA if you pay a domestic worker a cash salary of $ 1,000 or more in a calendar quarter of that year or if you did so in a calendar quarter in 2020 The FUTA is equivalent to 6% on the first $ 7,000 of cash wages paid during the year. Salaries over $ 7,000 are not affected by FUTA. While the FUTA rate is typically 6%, you can claim up to 5.4% credit against your FUTA liability.
What is my FIT withholding obligation?
Fortunately, you don’t have to withhold FIT from the salary paid to a domestic worker – unless the employee asks you to and you agree. In this case, the employee must give you a completed IRS Form W-4 (Employee Deduction Certificate) to enable you to calculate the withholding amounts according to the table in publication 15-T of the ‘IRS (Federal Income Tax Withholding Methods).
What about non-cash wages?
For the purposes of the FIT (including the withholding of the FIT from a domestic employee’s wages and salaries reported on the employee’s W-2 form), taxable wages generally include wages in cash and not in cash. Measure the value of any non-cash wages based on the fair market value of what is provided. However, the following forms of non-pecuniary compensation are not considered taxable wages:
Meals provided to the housekeeper at your home for your convenience.
Housing provided to the housekeeper at your home for your convenience and as a condition of employment.
For 2021, up to $ 270 per month for transit passes so your domestic worker can get to your home. See IRS Publication 15-B (Employers’ Tax Guide to Employee Benefits) for more details.
For 2021, up to $ 270 per month to reimburse your household employee for parking at or near your home or at or near a location from which the employee comes to your home. See IRS Publication 15-B for more details.
Key point: Non-cash wages are not subject to FICA or FUTA tax according to IRS publication 926.
How can I comply with the Nanny Tax rules?
It’s a pain. First, you will need to obtain a Federal Employer Identification Number (EIN) for FICA tax withholding and filing purposes, FUTA payment purposes, and FIT withholding and filing purposes. Your domestic worker will need a Tax Identification Number (TIN), which can be the employee’s Social Security number if the employee has one. You can obtain your EIN from the IRS and, if applicable, use that number to obtain a state identification number from the appropriate state tax agency, if applicable.
Key point: you can apply for your federal EIN online here. Or you can submit an IRS Form SS-4 (Request for Employer Identification Number).
You must provide your domestic worker with a W-2 form to report taxable wages paid during the year. The due date is January 31 of the following year. Your employee then uses Form W-2 to file their Form 1040. You must send the IRS a copy of Form W-2.
The Social Security Administration (SSA) requires you to file an annual W-3 form (transmission of salary and tax returns) and an annual copy of the W-2 form. Filing these forms informs the SSA that you have withheld and paid the FICA tax on your domestic employee’s salary.
Finally, complete Schedule H (Household employment taxes) with your Form 1040. Use Schedule H to calculate the total household employment taxes (FICA, FUTA and FIT tax withheld from the salary of employee, if applicable). Report the total household employment taxes on Schedule 2 (Additional Taxes) of Form 1040. Employment taxes are then carried over from Schedule 2 to line 23 of Form 1040 in addition to your tax. federal income.
For tax year 2021, pay the amount due no later than 04/15/22. To avoid an interest charge penalty, you can pay these taxes up front through estimated quarterly federal tax payments. Submit quarterly payments with IRS Form 1040-ES (Estimated Tax for Individuals). For tax year 2021, estimated tax payments are due on 4/15, 6/15, 9/15, and 1/18 of next year.
Key point: As stated earlier, you may also be required to withhold state income tax from your household employee’s salary and pay state unemployment insurance.
What if I don’t withhold the FICA tax?
You have the option of paying your household employee’s FICA tax share out of pocket instead of withholding it from the employee’s salary. If you choose this route (as many people do), increase the wages declared for federal income tax purposes on the employee’s Form W-2 by the amount you pay for the tax share. Employee’s FICA. Then follow the rest of the exercise explained above.
Can I claim the child and dependents credit based on a nanny’s salary?
Perhaps. If you have one or more eligible people under your wing, you may be eligible for the Child and Dependent Credit (CDCC). The credit covers eligible expenses that you pay to care for one or more eligible people so that you can work, or if you are married, so that you and your spouse can work.
Eligible persons are defined as your child under 13, your stepchild, your foster child, your brother or sister, your half-brother or a descendant of one of these persons, such as a little one. -child. The individual must live with you for more than half of the year and must not provide more than half of their own support. A disabled spouse or disabled dependent who lives with you for more than half of the year may also be an eligible person.
Subject to monetary limits, eligible expenses include salaries paid to a nanny or other domestic worker who cares for an eligible person so that you can work.
For more details, see my previous column here.
The bottom line
As you can see, Nanny Tax rules are quite complicated and complying with them can be a time consuming nuisance. No one will blame you if you hire a payroll or tax professional to take care of this stuff. It would be money well spent.