The NO-NO’s of Household Employee Taxes

Hiring people can be very confusing when it comes to what forms & information to get from your employees and also what to provide your employees with when tax season rolls around. Here’s what you need to know.

Domestic employees or household employees — such as nannies, gardeners, or senior caretakers — you are required to pay and withhold social security and Medicare taxes.

  • You will have to obtain an Employer Identification Number (EIN) as well as
    provide each employee with a W-2 no later than January 31st.
  • If it’s your first time working with domestic employees, the rules and regulations can be a lot to take in.

Don’t Mistake Your Employees for Independent Contractors

  • Independent Contractors V.S. Domestic Employees
    • Independent: Plumbers/Repairmen- they provide services to the general public while bringing their own tools and they control how they perform the work
    • Domestic: People you hire where you control who, what, where, when, and how the work is done. This power comes with the responsibility to correctly identify your employees and pay the proper taxes.

Do Not Claim Your Employees in Your Business Tax Deductions 

  • If you own your own business, you cannot claim your domestic employees in your business tax deductions.
    • The IRS says that since household employees aren’t contributing members of your business, you must handle their wages through the personal tax process.

Don’t Ignore Overtime 

  • Household workers, like nannies, are considered non-exempt workers under the Fair Labor Standards Act.
    • That means that employers must pay overtime when employees work over 40 hours per seven-day work week. Overtime must be paid at least 1.5 times that of the regular pay rate.
    • The exception to this is if your employee lives with you, such as a live-in nanny.
    • Trying to get around this rule by offering a salary instead of an hourly wage is illegal, and you may face repercussions long after you terminate an employee.

Don’t Withhold Calculations From Your Employee

  • Employees are entitled to view the details of their paycheck. For each payment period, household employees should receive a paycheck that itemizes hourly and overtime rates as well as the number of hours being paid for that period.
    • You should also detail any deductions for Social Security, Medicare, and federal and state income taxes that you’re withholding.

Don’t Wait Until Tax Time To Address Taxes

  • Contact a tax advisor with expertise in household employees at the time of hire. This will help you prepare for tax season with fewer bumps along the way.

Don’t Pay Off the Books

  • Paying off the books refers to not reporting paid wages. Some people try to get around this by paying in cash, since this is a difficult means of money transfer to track. This is a big no-no. It can lead to tax fraud charges. If your taxes go unpaid, you may face felony charges that will affect you for the rest of your life.
    • Remember, you have to report the following as household employee wages:
      • Salary and bonuses
      • Overtime
      • Vacation and sick pay
      • Taxes not withheld from paycheck
      • Car allowances
      • Gift cards
      • Other cash benefits


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