- Learn the definition of a household employee.
- Find out how control factors into the question of employment.
- Learn the difference between self-employed and employee.
- Discover the withholding requirements of employers.
- Find out the reporting requirements for employers.
Taxpayers often will hire an individual or firm to provide services at the taxpayer’s home. The IRS requires employers to withhold taxes for employees and issue them W-2s at the end of the year. So, the big question is whether or not that individual is a household employee or a contractor. There are some questions you'll need to answer to make that determination. If your household help is an employee, what exactly is required of you so far as taxes, withholdings, etc.? Fiducial has the answers!
What Constitutes an Employee?
Determining whether a household worker is considered an employee or a contractor depends a great deal on circumstances. You must also consider the amount of control the hiring person has over the job and worker they hire. Ordinarily, when someone has the last word about telling a worker what needs to be done and how that worker is an employee. Having a right to discharge the worker and supplying tools and the place to perform a job are primary factors that show control.
How is a Contractor Different from an Employee?
Not all those hired to work in a taxpayer’s home are considered household employees. For example, an individual may hire a self-employed gardener who handles the yard work for themselves and some neighbors. The gardener supplies all tools and brings in other helpers needed to do the job. Under these circumstances, the gardener isn’t an employee and the person hiring him/her isn’t responsible for paying employment taxes. The same would apply to the person hired to maintain an individual’s swimming pool or contractors making repairs on a home.
Contrast the following example to the self-employed gardener described above. The Johnson family hired Maclovia to clean their home. She also cares for their 3-year old daughter, Kim, while they are at work. Mrs. Johnson gave Maclovia instructions about the job to be done. She explained how the various tasks should be done, and provided the tools and supplies. Mrs. Johnson, and not Maclovia, had control over the job. Under these circumstances, Maclovia is a household employee.
Household Employees and W-2s
Since Maclovia is an employee, the Johnsons are responsible for certain withholdings and taxes. They are also responsible for issuing her a W-2 for the year.
W-2 forms are to be provided to the employee by January 31 of the year following when the wages were paid. The government’s copy of the form – sent to the Social Security Administration – is also due by January 31.
Tax Withholding Requirements and Options
If an individual you hire is considered an employee, there are things you must do. You must withhold both Social Security and Medicare taxes (collectively often referred to as FICA tax) from the household employee’s cash wages if they equal or exceed the $2,300 threshold for 2021.
The employer must match from his/her own funds the FICA amounts withheld from the employee’s wages. Wages paid to a household employee who is under age 18 at any time during the year are exempt from Social Security and Medicare taxes unless household work is the employee’s principal occupation.
Although the value of food, lodging, clothing, or other noncash items given to household employees is generally treated as wages, it is not subject to FICA taxes. However, cash given in place of these items is subject to such taxes.
A household employer doesn’t have to withhold income taxes on wages paid to a household employee. However, if the employee asks to have withholding, the employer can agree to it. When income taxes are to be withheld, the employer should have the employee complete IRS Form W-4. The withholding amount is based upon the federal income tax and FICA withholding tables. Have questions about this? Your Fiducial rep can help!
What's in a Wage?
The wage amount subject to income tax withholding includes salary, vacation and holiday pay, bonuses, clothing, and other non-cash items, meals, and lodging. However, if furnished for the employer’s convenience and on the employer’s premises, meals are not taxable, and therefore they are not subject to income tax withholding. The same goes for lodging if the employee lives on the employer’s premises. In lieu of withholding the employee’s share of FICA taxes from the employee’s wages, some employers prefer to pay the employee’s share themselves. The FICA taxes paid on behalf of the employee are treated as additional wages for income tax purposes.
A household employer who pays more than $1,000 in cash wages to household employees in any calendar quarter of either the current or the prior year is also liable for unemployment tax under the Federal Unemployment Tax Act (FUTA).
Although this may seem quite complicated, the IRS provides a single form (Schedule H) that generally allows a household employer to report and pay employment taxes on household employees’ wages as part of the employer’s Form 1040 filing. This includes Social Security, Medicare, and income tax withholdings, and FUTA taxes.
Sole Proprietorships and Household Employees
If the employer runs a sole proprietorship with employees, the household employees’ Social Security and Medicare taxes and income tax withholding may be included as part of the individual’s business employee payroll reporting. To note: these are not deductible as a business expense.
The federal requirements can generally be handled on an individual’s 1040 tax return. You should also look into state reporting requirements that entail separate filings.
Form I-9, Employment Eligibility Verification
Another form that is required to be completed when hiring a household employee who works for an employer on a regular basis is the U.S. Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. By the first day of work, the employee must complete the employee section of the form. They do so by providing certain required information and attesting to his or her current work eligibility status in the United States. The employer must complete the employer section. They must examine documents (acceptable documents are listed on the I-9) presented by the employee as evidence of his or her identity and employment eligibility. The employer should keep the completed Form I-9 in his or her records. It should be made available upon request of the U.S. government. It is unlawful to knowingly hire or employ an alien who can’t legally work in the United States.
Independent Contractors and 1099-MISC
If the individual providing household services is determined to be an independent contractor, there is currently no requirement that the person who hired the contractor file an information return such as Form 1099-MISC. This is so even if the services performed are eligible for a tax deduction or credit (such as for medical services or child care). The 1099-MISC is used only by businesses to report their payments of $600 or more to independent contractors. Most individuals who hire other individuals to provide services in or around their homes are not doing so as a business owner.
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