Domestic Employee Taxes – Federal Requirements for Household Employers, Part I
Household employers often have questions about tax considerations related to domestic staff employment, and for good reason. When domestic employers do not properly classify employees and the employers fail to make the required tax filings and payments, the IRS may consider this tax fraud. In this guide, we'll focus on U.S. federal tax requirements only, as a state-by-state overview is beyond the scope of this brief guide.
However, it must be noted that state requirements should not be overlooked, as penalties and interest assessed by the various state taxation departments could be substantial.
I (Aleksandra Kardwell, President of HEA) would also like to point out that while my fellow Rotarian, John Larkin, CPA, ABV, of Markowitz, Fenelon & Bank, LLP in Bridgehampton, NY, kindly advised on this guide, every household employer's situation is unique, and it's wise to consult a tax professional to discuss your particular household situation. Moreover, given the complexity of domestic employment tax compliance, you may choose to work with a firm that offers not only advice for household employers, but also household payroll and payroll tax services.
With that said, the right place to start to gain an understanding of federal tax obligations is the seventeen-page "IRS Publication 926, Household Employer's Tax Guide". The information provided below is excerpted from that guide. I've included certain sections only to offer you a concise, big-picture view of the primary federal tax requirements that affect most domestic employers. Much of the information is quoted word-for-word or with only very minor modifications to most accurately convey the IRS's requirements.
The introduction of the "Household Employer's Tax Guide" notes, "If you have a household employee in 2019, you may need to pay state and federal employment taxes for 2019. You generally must add your federal employment taxes to the income tax that you will report on your 2019 federal income tax return." Moreover, the tax guide can "help you decide whether you have a household employee and, if you do, whether you need to pay federal employment taxes (social security tax, Medicare tax, FUTA, and federal income tax withholding). [The guide] explains how to figure, pay, and report these taxes for your household employee. It also explains what records you need to keep. [The guide] also tells you where to find out whether you need to pay state unemployment tax for your household employee." Below is a summary of core sections of IRS Publication 926.
Who Should be Classified as a Household Employee?
The IRS's criteria for whether your household worker should be classified as an employee are relatively straightforward. If you hire someone to work in your private home and you direct that person's work, then the worker is your employee. Here's how the IRS explains it in the tax guide:
"You have a household employee if you hired someone to do household work and that worker is your employee. The worker is your employee if you can control not only what work is done but how it is done. If the worker is your employee, it doesn't matter whether the work is full time or part time or that you hired the worker through an agency or from a list provided by an agency or association. It also doesn't matter whether you pay the worker on an hourly, daily, or weekly basis, or by the job."
The tax guide provides some helpful examples to consider in deciding whether your domestic worker is an employee. Here's one such example:
"You pay Betty Shore to babysit your child and do light housework four days a week in your home. Betty follows your specific instructions about household and childcare duties. You provide the household equipment and supplies that Betty needs to do her work. Betty is your household employee."
What Work is Classified as Household Work? What Categories of Workers are Considered Household Workers?
The IRS tax guide also offers a definition of what is considered "household work," and which categories of workers are deemed to be household workers. Information on people who may work in your home but who should not be considered household workers is also provided:
Household work is work done in or around your home. Here are some examples of workers who do household work:
- Domestic workers
- Health aides
- Housecleaning workers
- Private nurses and
- Yard workers
Household work doesn't include services performed by these workers unless the services are performed in or around your private home. A separate and distinct dwelling unit maintained by you in an apartment house, hotel, or other similar establishment is considered a private home. Services not of a household nature, such as services performed as a private secretary, tutor, or librarian, even though performed in your home, aren't considered household work.
Who Should Not be Classified as a Household Employee?
Now let's take a look at what types of workers are not considered to be your employees by the IRS:
"If only the worker can control how the work is done, the worker isn't your employee but is self-employed. A self-employed worker usually provides his or her own tools and offers services to the general public in an independent business. A worker who performs childcare services for you in his or her home generally isn't your employee. If an agency provides the worker and controls what work is done and how it is done, the worker isn't your employee."
Here is an example of a work arrangement in which the worker would not be considered your employee:
"You made an agreement with John Peters to care for your lawn. John runs a lawn care business and offers his services to the general public. He provides his own tools and supplies, and he hires and pays any helpers he needs. Neither John nor his helpers are your household employees."Read Part II of our domestic employee taxes information here: Domestic Employee Taxes – Federal Requirements for Household Employers, Part II
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