Tax & Legal Impacts for Having a Nanny and Other Household Employees
Do you have a nanny, babysitter, maid, cook, butler, or other professional in your home? If you paid your household employee more than $2,700 total or more than $1,000 in any quarter, you may be required to register as an employer, confirm employment eligibility, and pay federal and state employment taxes.
In the realm of household employment, understanding the intricacies of nanny and household employee taxes is crucial for compliance and financial efficiency. When you hire a household employee, you are required to comply with various legal and tax obligations. This blog will guide clients through the complexities of household employee obligations, ensuring you understand the legal and tax requirements while maximizing potential tax benefits and explain the available tax credits and deductions to optimize your personal taxes.
Household Employees Compliance
What is a Household Employee?
Household employees are individuals hired to perform domestic services within a private home. This category includes nannies, housekeepers, gardeners, and other similar roles. The distinction between an independent contractor and a household employee is important, as it determines the employer's tax responsibilities. The IRS distinguishes between independent contractors (who are self-employed and control their work) and household employees (who are under your supervision and control). If you control what work is done and how it’s done, the worker is likely a household employee and you an Employer.
Legal & Tax Responsibilities as an Employer
IRS EIN: Employers of household employees must obtain an Employer Identification Number (EIN) from the IRS. This number is essential for reporting employment taxes and is distinct from a personal Social Security Number (SSN).
Form I-9 and Employment Eligibility: Compliance begins with verifying the employment eligibility of household employees. Employers must complete Form I-9, Employment Eligibility Verification, to ensure that the employee is legally authorized to work in the United States. This involves examining documents that establish identity and employment eligibility.
Social Security & Medicare Tax (FICA): Employers are responsible for withholding and paying Social Security and Medicare taxes for household employees. These taxes are collectively known as FICA taxes. For 2024, if an employer pays a household employee $2,700 or more in cash wages, these wages are subject to Social Security and Medicare taxes. Employers must file Schedule H with their federal income tax return to report these taxes.
Federal Unemployment Tax Act (FUTA): Household employers may also be subject to the Federal Unemployment Tax Act (FUTA). If an employer pays $1,000 or more in wages in any calendar quarter, they must pay FUTA taxes. However, if the household employee is the employer's spouse, child under 21, or parent, FUTA taxes do not apply. If you pay wages subject to FICA tax, FUTA tax, or if you withhold federal income tax from your employee's wages, you'll need to file a Schedule H (Form 1040), Household Employment Taxes and attach to your individual income tax return. If you're not required to file a return, file Schedule H by itself to report household employment taxes.
Issue W-2's: As an employer, you must report your household employee’s wages and taxes accurately to the IRS at the end of the year. Household employers must provide your household employee with a Form W-2, reporting their total wages and withholdings. This form also needs to be submitted to the Social Security Administration (SSA).
Estimated Tax Payments: If you file Schedule H (Form 1040), you can avoid owing taxes with your personal tax return if you pay enough tax before you file your return to cover both the employment taxes for your household employee and your income tax. If you're employed, you can ask your employer to withhold more federal income tax from your wages during the year. You can also make estimated tax payments to the IRS during the year using Form 1040-ES, Estimated Tax for Individuals. You may have to pay an estimated tax underpayment penalty if you don't pay your household employment taxes during the year.
Tax Credits & Deductions
Child and Dependent Care Credit: One of the most significant tax benefits available to household employers is the Child and Dependent Care Credit. This credit is designed to offset the cost of childcare for qualifying individuals, allowing the taxpayer to work or look for work. To qualify, the care must be provided for a dependent child under the age of 13 or a spouse or dependent who is physically or mentally incapable of self-care. The credit is calculated as 20% - 35% of the qualifying expenses, with a maximum limit of $3,000 for one qualifying child and $6,000 for two or more for tax year 2024. The percentage of expenses that can be claimed varies based on the taxpayer's adjusted gross income (AGI).
Employer Flexible Spending Account: If you are employed, maximizing FSA contributions will lower your taxable income while allowing you to contribute pre-tax wages to a tax advantage account. Your FSA funds can be used to cover the nanny or babysitter costs for dependents under 13 years old or who are disabled. The other benefits of using your FSA to pay your household employees is allowing you to budget by allocating costs and increase cash flows since FSA's generally provide access to the full annual contribution amount . However, FSA's also operate on a Use-it-or-Lose-it rule and unused amounts will be forfeited at the end of the year and not allowed to rollover (unless a grace period is provided). You must elect the amount of pre-tax withholding during the medical enrollment period. The maximum amount of FSA contribution for 2025 is $6,600 for married couples filing jointly, and $3,300 for all other taxpayers which will lower your taxable income by the amount contributed and withheld from your paycheck.
Medical Expense Itemized Deductions: If you itemize your personal taxes, household employers may also be able to deduct certain medical expenses related to household employees. For example, wages paid for nursing services can be included in medical expenses if the services are necessary for the care of a patient. This includes tasks such as administering medication or changing dressings. This deduction is not available to taxpayers that use the standard deduction.
Retirement Plans: Recent tax law changes have introduced the possibility for employers of domestic employees to provide retirement benefits through a Simplified Employee Pension (SEP) plan. This option, effective from 2023, allows employers to contribute to the retirement savings of household employees, offering a potential tax deduction for the employer.
Next Steps
Navigating the landscape of nanny and household employee taxes requires a thorough understanding of compliance obligations and available tax benefits. By ensuring adherence to federal and state requirements, employers can avoid penalties and optimize their financial strategies. Additionally, leveraging tax credits and deductions can significantly reduce the overall cost of employing household help. As an household employer, it is essential to have access to the knowledge and tools necessary to manage these responsibilities effectively, ensuring both legal compliance and financial efficiency.
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