How to: Hire a Household Employee

Here’s what we’ll cover:

• Introduction
• Who is a Household Employee?
• Your Obligations and Costs
• Additional Tax Reporting On Your Individual Return
• Risks
• Household Employees Payroll Software

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Introduction

Hiring a household employee, such as a nanny, housekeeper, or caregiver, requires careful attention to tax laws and regulations. This guide provides an overview of your responsibilities, the associated costs, and the potential risks involved.

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Who is a Household Employee?

A household employee is someone you hire to perform duties in or around your home, and you control both what work is done and how it is done. Examples include nannies, housekeepers, and gardeners. If the worker is classified as an independent contractor, they are not considered a household employee. The classification of a worker as an employee or contractor is a quite big subject that is covered by Labor Laws and courts - if you’re concerned about the classification we recommend consulting an attorney.

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Your Obligations and Costs

With great power comes great responsibility! Here are some of your obligations and associated costs of hiring a household employee:

Employer Payroll Taxes

• Social Security and Medicare (FICA): You must withhold and match Social Security (6.2%) and Medicare (1.45%) taxes from your employee’s wages.
• Federal Unemployment Tax (FUTA): You are required to pay FUTA at a rate of 6.0% on the first $7,000 of wages, with possible reductions for state unemployment contributions.
• State Unemployment Tax (SUTA): Rates vary by state, and you may need to pay this tax depending on your location.

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Withholding Income Taxes

• Federal Income Tax: Withholding is not mandatory unless agreed upon by both you and the employee.
• State and Local Taxes: Withholding may be required depending on state and local regulations.

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Reporting and Filing Requirements

• Form W-2 and Form W-3: Issue Form W-2 to your employee by January 31st and file Form W-3 with the Social Security Administration.
• Quarterly Returns (Form 941): File Form 941 quarterly if you withhold federal taxes.
• Annual FUTA Return (Form 940): File Form 940 annually to report FUTA tax.

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The good news are that there are software out there that can help you comply with the above.

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Additional Tax Reporting On Your Individual Return

If you cross the annual wages threshold for withholding and paying Social Security and Medicare taxes ($2,400) OR the quarterly wages threshold for paying FUTA tax ($1,000) - you will need to file Schedule H as part of your individual tax return (1040).

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Depending on your package and complexity, it may result in additional tax filing costs.

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Risks

Penalties for Non-Compliance

• FUTA Underpayment: Failure to pay FUTA taxes can result in penalties and interest charges.
• W-2/W-3 Non-Filing: Not filing these forms on time can lead to penalties starting at $50 per late or incorrect W-2.

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Non-Tax Risks

Any violation of the household employee’s rights or any damages caused them while working for you may expose you to legal risks.

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Those risks can be mitigated by getting proper insurance coverages:

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• Workers’ Compensation Insurance
• Liability Insurance
• Employment Practices Liability Insurance (EPLI)

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From a legal perspective, you always have the risk of:

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• Wrongful Termination
• Discrimination Claims
• Harassment Allegations
• Wage and Working Hour Disputes

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The above is not a comprehensive coverage of the risks and labour laws (state/federal) and you should consult your insurance agent and/or attorney if you want to learn more about it.

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We highly recommend to document and sign an employment agreement in all cases - again - if you’re not sure what to do - consult an attorney.

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Household Employees Payroll Software

Here is a list of a few payroll software providers you that can help you fulfill your employment obligations:

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1. HomeWork Solutions
2. Poppins
3. ADP

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Disclaimer: we’re not affiliated or knowledgable with those software, it’s important to choose a provider with great customer success who can help you operate them.

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Summary

Hiring a household employee comes with specific tax responsibilities. You’ll need to manage payroll taxes, file necessary forms, and understand the potential penalties for non-compliance. Utilizing specialized payroll software can help ensure you meet all obligations.

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ℹ️ Disclaimer

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The information provided in this guide is for general informational purposes only and does not constitute legal or insurance advice. While every effort has been made to ensure the accuracy and completeness of the information, it may not reflect the most current legal, tax, or insurance developments. Therefore, you should not act or refrain from acting on the basis of any content included in this guide without seeking professional advice from a licensed attorney, your Tax Lead at Gelt, or insurance professional.

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The examples of services mentioned are for illustrative purposes only and are not endorsements or recommendations. The inclusion of any services or references does not imply any affiliation with or endorsement by the authors of this guide. Furthermore, compliance with federal, state, and local laws is required when hiring household employees, and specific legal requirements may vary depending on your location.

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References

IRS Publication 926 (Household Employer’s Tax Guide)

This publication provides detailed guidance on the tax obligations of household employers, including how to withhold and pay Social Security, Medicare, and federal unemployment taxes.

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Schedule H (Form 1040) Instructions

Schedule H is used to report household employment taxes, including Social Security, Medicare, and federal unemployment taxes. The instructions detail the thresholds for filing and how to calculate the taxes owed.

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