Busy households sometimes find they need help with child care, yard work, cleaning, or other chores. This could turn your household into an employer and put you on the hook for paying employment taxes.
You don't need to spend a ton on household help to end up owing the tax. Rules for 2006 and 2007 say that you may owe taxes if you paid the nanny or any other household help $1,500 or more during the year. You're off the hook in most instances if you paid your spouse, child, parent, or someone under the age of 18.
That means you probably don't have to worry that calling the babysitter for an occasional night out will get you in trouble with the Internal Revenue Service. In other instances, you may be liable for the Social Security and Medicare taxes on the wages you pay your household help.
The IRS considers a household worker your employee if you control what work is done and how it is done. The worker isn't your employee if someone else -- like a business or agency -- controls how the work gets done. For instance, if Cleanest Cleaners sends someone to your house every two weeks to scour using their proprietary Cleanest Cleaning method, you don't control how the work is done. Other help, like plumbers and contractors, also typically aren't considered your employee even if they're self-employed.
On the other hand, if you put an ad in the paper and hire someone to watch your children full-time while you're at work, you probably owe what's been popularly dubbed the "nanny tax." You'll be the one in charge of the way your nanny does his or her work.
There can be a fine -- and gray -- line separating a household helper from being considered your employee and being considered an independent contractor. If you know your newly employed helper gets paid through an agency or small business that takes care of the tax obligations, then they've shouldered that responsibility for you. The same is probably true if your help runs itself as a small business or sole proprietorship. Add this question to your list when interviewing potential household helpers if you're unsure.
In the case of nannies, the IRS says that someone who provides child care from his or her home, instead of working in your home, is generally not your employee. That means the taxes aren't your responsibility. If you have any uncertainty, seek the advice of a tax professional. It could save you big headaches later.
If your household help is considered your employee, you'll be required to pay Social Security and Medicare taxes for wages paid to that person. The taxes total 15.3% of the wages you pay to your employee.
Technically, the responsibility splits in half. You're on the hook, as the employer, for a 7.65% tax on the employee's wages. (This is 6.2% for Social Security and 1.45% for Medicare.) Your employee is on the hook for the other 7.65%.
You may approach this in one of two ways. You can withhold the employee's half of the taxes from the paid wages. If you take a look at your paycheck, you'll see this is what most employers do. You may otherwise just pay the taxes yourself. In that case, you'll need to count that tax payment as part of your employee's wages.
Let's say you hire Forrest Grass to maintain the grounds around your estate for $100 each week. You can withhold taxes from Forrest's pay and give him $92.35 at the end of the week. Or, you can pay him $100 and pull the $7.65 from your own pocket. In that case, his weekly pay was actually $107.65.
If you find yourself owing taxes for household help, you have a couple of options for making the tax payments. You can ask you employer to withhold more money from your paycheck. You'll need to go to your friendly human resources department and file the appropriate forms. Or, you can pay estimated taxes to the IRS. Either way, think ahead. You may owe a penalty when it comes time to file your return if you didn't pay enough in taxes throughout the year.
You don't have to withhold income taxes from your employee's pay unless you and the employee agree to do so. But, like much of the territory when it comes to taxes, the situation can get more complex. You may owe federal unemployment taxes; you may also owe some state taxes.
As you can probably guess, you'll also have quite a bit of paperwork. Take a look at this IRS publication for more information. If you have any questions about your responsibilities, you might want to check with a tax advisor. Check out our Advisor Center for help getting the most for your money.
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