Content on this page provided courtesy HomeWork Solutions Inc., the nation's leading preparer of household employment payroll and tax returns.
- I have a domestic (nanny, elder care giver, housekeeper) working in my home. What taxes do I need to pay?
- What taxes does my employee pay?
- How are the employee's payroll taxes paid?
- How often do I need to pay these taxes?
- Congress simplified the "nanny taxes." What does that mean to me?
- My domestic (nanny, elder care giver, housekeeper) wants to be treated as a "contractor." Can I do that?
- Do I need to pay minimum wage? What about overtime?
- What about worker's compensation and disability insurance?
- Am I required to hire U.S. citizens?
- My employee is not a legal resident. What should I do about employment taxes?
- What is "New Hire Reporting"?
- I have heard that I can get a personal tax break for child care? Is that true?
- Is health insurance for my domestic (nanny, elder care giver, housekeeper) taxable?
- How do we handle the taxes if we share a nanny with another family?
- What may happen if I don't pay the taxes?
- Do the rules ever change?
1. I have a domestic (nanny, elder care giver, housekeeper) working in my home. What taxes do I need to pay?
In general, the Internal Revenue Service requires payroll tax filings by a domestic employer who pays a household employee more than $1500* cash wages in a calendar year. These payroll tax obligations may include:
- Social Security & Medicare Taxes (7.65% of Gross Wages)
- Federal Unemployment Tax (FUTA) (0.8% of Gross Wages or less in Most Circumstances)
- State unemployment and disability insurance taxes levied on the employer.
- Advance payment of the earned income credit for eligible employees.
(* The $1500 threshold applies to 2006 and 2007 household payroll! Wage test is $1400 for years 2003 - 2005, $1300 for 2001 & 2002, $1200 for 2000, $1100 for 1998 & 1999, years 1995 - 1997 were $1000)
2. What taxes does my employee pay?
Your employee contributes to or pays:
- Social Security & Medicare Taxes (7.65% of Gross Wages Collected and Remitted by Employer)
- Employee Disability/Unemployment Taxes where required.
- Federal/State Income Taxes
The employer is soley responsible for the remittance of the Social Security and Medicare taxes. Should the employer fail to collect this tax from the employee via periodic payroll deductions, the employer remains responsible to remit or pay the tax to the IRS. The household employee CANNOT remit their share of Social Security and Medicare tax independent of the employer.
3. How are the employee's payroll taxes paid?
You, the employer, are required to collect the employee's social security and medicare taxes. Should you fail to collect, you remain responsible to remit these taxes for the employee. Deducting federal income taxes and most state income taxes is optional. If income taxes are not withheld by the employer, then the employee is required to make periodic payments of any amounts due.
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4. How often do I need to pay these taxes?
Employers of domestic workers must, at a minimum, make annual payments for Social Security, Medicare and Withheld Income Tax (if applicable). Wage reporting must occur quarterly. Generally, state unemployment taxes and withheld state income taxes must be paid on a quarterly basis and Federal Unemployment is due annually. You are required to give your employee a wage and tax statement (Form W-2) no later than January 31.
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5. Congress simplified the "nanny taxes." What does that mean to me?
Congress revised the "Nanny Tax" legislation in October 1994, offering employers alternative means to remit the federal payroll taxes for wages paid after 1/1/95. Most payments to household workers under 18 years of age are now exempt. The legislation requires employers to disclose the wages paid to household staff on the employer's personal income tax return. Failure to disclose this information will compromise the integrity of your personal tax return.
Most important, this 'simplification' only affects your FEDERAL employment tax obligations. Most state reporting requirements remain on a quarterly schedule.
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6. My nanny (domestic) says she's an independent contractor and doesn't want taxes withheld. Can I do that?
The simple answer is no. The IRS has strict guidelines to define employees and independent contractors (Refer to IRS Publication 926). Nannies and other domestics are generally considered employees. It does not matter how the employee refers to herself or how you refer to her in an employment contract. You are obligated for all payroll tax filings and remittances.
The IRS has reaffirmed this stance twice in 1999. In two private letter rulings (PLR 199923014 and 199923015) the IRS disregarded a written contract's designation of a worker as a contractor, ruling that the substance of the relationship and not its label determines the worker's status.
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7. Do I need to pay minimum wage?
Domestic employees have been covered by the Fair Labor Standards Act since 1974 and must be paid at least the greater of your state's minimum wage or the Federal minimum wage, currently $5.15 (effective 9/1/97). (There are many states which enforce higher minimum wages. Where Federal and state law have different minimum wage rates, the higher standard applies.
Minimum Wage by State.)
Overtime: All domestic employment is considered 'non-exempt' and all wages for domestic employment are subject to overtime. You are required to pay a domestic employee who lives out overtime (for hours above 40 in a week). Overtime is one and one-half times the normal hourly rate. Live-in employees must be paid for every hour they work but are not automatically entitled to the overtime differential.
These rules are governed by the Fair Labor Standards Act. Please familiarize yourself with these rules if you are considering a pay rate that does not meet the FLSA standards articulated above.
IMPORTANT Elder Care Notice: in Coke v. Long Island Care (22-Jul-2004)the Federal Court of Appeals ruled that the FLSA regulations (29 C.F.R. § 552.109(a)) - which specifically apply to "companionship services" provided by other than family members of those receiving the services - are internally inconsistent and not owed the high level of deference usually granted federal regulations. The court found that "companionship services" exemption for home health-care providers should not apply to non-related employees because the intention of the regulation was to exempt companions, not individuals employed to assist with housekeeping and the daily activities of living. There had been several legislative attempts to expand the FSLA coverage applied to 'companions for the elderly and infirm' in the late '90's. Be advised that the professional accreditation of the eldercare worker will likely affect the FLSA exemption. When in doubt, and particularly when dealing with elder care workers with RN, LPN, and CNA licenses, we recommend that you follow the FLSA rules for domestic workers.
8. What about worker's compensation and disability insurance?
The state regulations governing who needs to obtain worker's compensation and disability insurance vary. We recommend discussing your local regulations with a licensed insurance broker.
Worker's Compensation is protection mandated under state law for a worker and his or her dependents against injury and death occurring in the course of employment. It is not health insurance, and it is not intended to compensate for a disability other than disability caused by injury arising out of employment.
The purpose of a worker's compensation system is to provide financial and medical benefits to the victims of 'work-related' injuries and their families regardless of fault. The cost of this insurance is borne by the employer. Insurance premiums are determined by the number of employees, their annual payroll, and the type of work they do.
This insurance may be purchased through a licensed insurance
broker and/or a state insurance fund. This is a policy of insurance and not a payroll tax.
Click Here to see USA Today July 1997 Worker's Comp Information
Click Here to see the US Department of Labor Survey of Worker's Compensation rules as they apply to domestic service.
9. Am I required to hire U.S. citizens?
You may legally hire a U.S. citizen, an alien lawfully admitted for permanent residence, or an alien with a valid work permit. You are required to verify your candidate's employment eligibility using Form I-9.
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10. My employee is not a legal resident. What should I do about employment taxes?
The IRS maintains that the immigration status of your employee has no bearing on your obligation for employment taxes. The IRS requires that workers ineligible for Social Security Numbers file form W-7 request an Individual Taxpayer Identification Number. This number will be used on all tax reports and returns, including Form W-2. The IRS is currently prohibited from sharing this information with the Immigration and Naturalization Service by law. Non-payment of taxes is a reason for an alien's immigration petition to be declined.
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11. What is "New Hire Reporting"?
Effective January 1998, Federal welfare reform legislation (Personal Responsibility and Work Opportunity Act of 1996) requires all employers to report information on all newly hired workers within a specified period, generally 2 weeks, or incur a penalty. Each state has designated an agency responsible for the collection of data and enforcement of the requirement. These laws are intended to expedite enforcement of child support orders.
Follow this link for more information on New Hire Reporting.
12. I have heard that I can get a personal tax break for child care? Is that true?
There are two popular strategies that families use to minimize their personal income taxes. Many families can utilize a flexible spending plan (cafeteria plan) offered by their employer for child and dependent care expenses. Your human resources department can provide you with plan details. Another strategy is the Child Care Credit available to many parents. This credit can directly reduce the parent's income taxes by between $480-$1,440 a year.
13. Is health insurance for my nanny taxable?
Health insurance may be provided as an employee benefit. The employer generally pays the premium directly to the insurance carrier and the premium is not taxed as income to the employee.
14. How do we handle the taxes if we share a nanny with another family?
Generally, when you share a nanny with another family, you both become employers. Presuming that you each pay the nanny for the work performed for your individual family, each employer is responsible for withholding payroll taxes and the periodic remittances of payroll taxes.
15. What may happen if I don't pay the taxes?
Failure to report domestic wages paid after January 1, 1995 will compromise the validity of your personal income tax return. Additionally, there is no statue of limitations on the failure to report and remit federal payroll taxes. You are most likely to be "caught" when a former employee files for unemployment or social security benefits. Employers are generally required to pay back taxes, penalties and interest charges, and usually professional fees for an accountant and/or attorney. HomeWork Solutions can assist employers becoming current with back tax obligations.
16. Do the rules ever change?
Yes. Many rule changes resulting from the Federal "simplification" are still being defined. For example, in 1997 all household employers are required to submit Form W-3 to the Social Security Administration for the first time. Effective in 1998, Federal household employment taxes are subject to penalties if not paid in periodically by the employer, either by submitting quarterly payments or adjusting withholding on the employer's paycheck. HomeWork Solutions' professionals keep current with these changes and notify clients accordingly.
For More Information contact HomeWork Solutions, Inc.
at 1-800-NaniTax or e-mail and submit a question.
[last update February 2007]
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