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Do I have an independent contractor or a household employee?
If a person is providing nanny, elder care giver or housekeeping the answer 99% of the time is you have a household employee, NOT independent contractors. The key is the ability of you, the employer to control there services. Even if they sign a contract saying they are an independent contractor the IRS will analysis the nature of the work and nullify the designation. At that point you will be required to pay all taxes due and interest, fines and penalties.
When do I need to file taxes for my household employee?
In general, the Internal Revenue Service requires payroll tax filings by a domestic/household employer when they pay more than $1,500 (2006) in wages in a calendar year. State filing can vary state by state but typically the reporting is quarterly, in most cases you will need to get one or two new (i.e. different than you Social Security number) before you submit your quarterly tax return...Or sign up with us and we take care of all of that.
How reporting and paying taxes on a Household Employee can save you more then if you had paid your employee “under the table”
You know that properly reporting & paying your household employee is a good idea but your concern about the cost in taxes and filing fees below we have a typical example:
EXAMPLE:
Your household employee works 30 hours a week at $10.00 per hour ($15,000 per year) based on a (high) estimate of you the employer will have to pay an additional 10% on top of the wages in employer payroll tax that would add an additional ~$1,500 per year on top of the $15,000. Add our low $550 year fee this totals $2,050 per year in taxes and payroll processing fees that you will pay. REMEMBER that if your employer has dependent care cafeteria plan you could save ~$2,250 in federal and state taxes. Therefore by paying your employee legally in this situation you can net a $200 savings in federal and state taxes over paying the employee “under the table”.
Do I need to pay minimum wage?
Houshold employees are covered by the Fair Labor Standards Act and must be paid at least the Federal minimum wage, currently $5.15. Also, some states have a minimum wages above the federal amount that you may need to comply with: (As of last update: Alaska $7.15, California $6.75, Connecticut $6.90, Delaware $6.15, District of Columbia $6.15, Hawaii $6.25, Maine $6.25, Massachusetts $6.75, Oregon $6.90, Rhode Island $6.15, Vermont $6.25, Washington $7.01)
Do I need to pay Overtime?
You are required to pay a domestic employee who is living outside your residence for overtime (typically this is hours worked 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 (contact us we can examine your situation).
Some states enforce overtime on hours worked over 8 each day, not basing it on a 40 hours a week. .
What taxes do I have to withhold from my employee?
You don’t have to withhold any taxes from your employee’s paycheck. HOWEVER: as an employer you have to pay Social Security, Medicare and maybe some type of state taxes on wages paid to an employee. The IRS really doesn’t care who is paying the tax just as long as it’s being paid.
This gives you several options to consider (presented in order of the least expensive to the most expensive to you the employer):
1. Withhold the mandatory withholding (i.e. SS & Medicare) and necessary income taxes (our recommendation)
2. Only withhold the mandatory withholdings (this is the same tax expense to you but your employee could end up with a tax bill they might find difficult to pay come April 15th).
3. Withhold nothing and you pay for the required withholdings
4. Withhold nothing and you pay for the required withholdings and employee income tax due(The most expensive to you but your employee will really like this option)
Keep in mind that your employee will need to file a state and federal tax return because they will receive a W-2. If you choice to pay based off a net, or “take home pay” (say $10 per hour) we can tell you the approximate taxes that you will have to pay, give us a call. We can setup your account to increase the base wage amount to offset the taxes that are required to be withheld from their check. Sometimes it’s easier to discuss with a household employee take home wages....call us before that conversation we can run the numbers.
When and how do I pay payroll taxes on a household employee?
Federal tax reporting (IRS/Social Security & amount withheld from your employee's check) are reported annually via your personal 1040 tax return, you attach form "H" to your personal 1040 tax return (we provide a completed form H with our service). You have the option to pay federal taxes at the end of the year however on your 1040 you must have paid 90% of taxes due to not incur a penalty. (Example: you owe $8,000 on your normal 1040 and on schedule H you owe $2,000 a total of $10,000 for the year, you would have need to pay $9,000 to the IRS (via your W-2) to not incur a penalty from the IRS). Many of our clients send estimated quarterly tax payments to the IRS for these amounts that they withheld and owe so they will not be hit with a large tax bill come April 15th (or penalty for under paying). Each quarter we provide a summary of amounts owed and the necessary forms to submit your payment.
State wage reporting is done quarterly and generally, state unemployment taxes and withheld state income taxes must be paid with your report. We provide you all these reports that you can sign and send in the necessary amount or in most cases we can report electronically on your behalf with the funds coming out of your checking account. Although, we can't get your tax liability down to zero we provide a service where it is as pain free as it possible can be.
Worker's compensation and disability insurance?
The state regulations governing who needs to obtain worker's compensation and disability insurance vary. Although we can help in determining what your state requirements are it’s much easier to call your licensed insurance broker and discuss the requirements locally. Typically we hear that the insurance agent will add a rider policy on to your home owners for a nominal fee (under $100). This is an important call to make because if you employee is injured at your house the injury will not be covered under your liability section of your home owners policy. Remember this is true if you properly register as a household employer or if you pay the employee under the table. Don’t think that this is just one more costs that I wouldn’t pay if I paid the employee under the table. Also, remember that 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.
Health Insurance
Some household employers offer health insurance to their employees and the phone call you make to your insurance agent for workers compensation ask about health insurance costs. The benefit you provide your employee also can provide a tax benefit. Payments made towards health insurance are not considered taxable wages. You can withhold the amount from your employees check for their healthcare premium. This amount you and your employee will not have to pay any taxes on. If you do pay the health premiums directly make sure to keep some proof of the insurance was for your employee.
Do you have to hire a U.S. citizen?
Legally your options are to 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 (which we provide).
What states do we provide service in?
Our currently system is programmed to service household employers in 37 states: AL, AK, CA, CO, CT, DC, FL, GA, HI, ID, IN, IA, KY, LA, MD, ME, MI, MN, MO, MS, NE, NV, NM, NY, ND, OK, PA, SC, SD, TN, TX, UT, VT, VA, WA, WV and the District of Columbia.
Our goal is to service all 50 States, if your state is not listed contact us to see if we are in the process of adding your state.
What our clients say
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