This article was originally published on Kiplinger.com
If you’ve been thinking about hiring a nanny, housekeeper, maid, driver, personal chef, gardener or someone else to help you around the house, it’s important to know what you’re financially responsible for as a household employer.
Understanding the differences between “employee” and “self-employed”
It’s important for both you and your new hire to understand your working relationship, since you can both potentially get in trouble with the IRS if you don’t.
- A self-employed household helper gets paid as a 1099 contractor. They generally provide their equipment or supplies and negotiate their work hours and responsibilities.
- A household employee is someone whose schedule and responsibilities you personally manage.They use the resources you provide. But their work must specifically relate to the upkeep of your home or in providing for the well-being of individuals residing there. This definition excludes certain categories of home-based workers, such as private secretaries, tutors and music teachers.
Document eligibility
What’s one of the first things you do when you start a new job? Fill out a Form I-9, which documents your eligibility to work.
Household employees have to do the same. They must fill out Form 1-9 and provide identification, such as a U.S. passport, driver’s license and Social Security card.
As an employer, it’s your job to hold onto these forms (and copies of identification) and make them available for inspection by authorized governmental authorities. The U.S. Citizenship and Immigration Services Form I-9 page can walk you through this process.
The payroll threshold
Generally, you only have to deal with payroll taxes if you pay your hired help more than $2,600 in a calendar year. However, in some cases, spouses and other family members taking on these roles can earn more than $2,600 without being taxed.
These situations aren’t always straightforward, which is why you should always consult with a tax professional before any new employee starts working for you.
Most full-time household employees will make much more than this, so it’s important to get up to speed on the intricacies of payroll management.
As an employer, you need to make sure you’re handling your payroll responsibilities accurately and in compliance with federal and state laws.
That’s why you might want to use payroll software designed for small businesses. These programs can calculate federal and state taxes, maintain records of filled-out tax forms, pay your employee via checks or direct deposit and prepare year-end tax reports. Many of these programs offer basic functionality for free.
Becoming an IRS-recognized employer
If you’re going to be a household employer, you might as well be recognized as one. You can do this by applying for an Employer Identification Number (EIN) from the IRS. Note that you can’t use your Social Security number as an EIN.
Calculating payroll taxes
While your employee can pay their share of their taxes on their own, to minimize the risk of underpayments and penalties it’s better for you to withhold taxes directly from their paychecks. The first step is for your new hire to fill out a W-4/Employee’s Withholding Certificate. While you’ll need to calculate the amount of federal income tax withheld based on the number of exemptions they choose, several tax rates will remain the same:
- The 12.4% Social Security tax,which is split between you and your employee, with each paying 6.2%.
- The 2.9% Medicare tax,also split between you and your employee, with each paying 1.45%.
- Federal unemployment tax of 6%on the first $7,000 of income, if you paid total cash wages of $1,000 or more to a household employee in any calendar quarter in 2023. As the employer, you pay this tax yourself, although in some cases you may be eligible for a 5.4% tax credit for unemployment tax you pay.
- State income taxes. If your state has a state income tax, you’ll have to deduct them from their paychecks as well. Contact your state’s department of revenue to find out how much.
- Other taxes. Certain states levy unique payroll taxes. For example, in Massachusetts employers must withhold 0.75% of every employee’s paycheck as contributions to the state’s Paid Family and Medical Leave program.
You’ll need to keep immaculate records for every paycheck, including hours worked, amounts paid and taxes withheld. And every January, you’ll need to provide a W-2 wage and tax statement to your employee and file copy A with the IRS.
You’ll find additional information about employee taxation in the IRS Household Employer’s Tax Guide.
Beefing up your insurance
If your employee gets injured on the job, you want to make sure that your homeowner’s insurance will cover their medical and loss-of-income claims.
You might need to add a special rider to get this extended coverage. Make sure you have the appropriate level of coverage before your new employee starts their first day of work.
Also, keep in mind that many states require household employers to carry workers' compensation insurance in certain situations if they’re hiring nannies, housekeepers or other caregivers.
Even if your state doesn’t require it, you may want to buy workers’ compensation insurance anyway, since it may offer added protection for work-related injuries not covered by your homeowners’ insurance.
Deducting 'nanny' expenses
If you’re hiring a nanny, you may be able to deduct as much as $3,000 per child ($6,000 maximum for two or more children) in child care-related expenses, as long as both you and your spouse are working and your children are younger than 13 years old.
Or, if your company offers a Dependent Care Account (sometimes called a Dependent Care Flexible Spending Account), you may be able to make pre-tax contributions of up to $5,000 per year to help pay for qualified child care expenses. Again, it’s important to talk to your tax professional to figure out which options offer the best tax benefits.
Meet with the experts
You definitely should consult with your tax professional before you hire your new household helper. But you may want to meet with a financial advisor as well. This combination of expertise not only can help you understand your responsibilities as an employer but can help you figure out how to adjust your cashflows to take on these added expenses and estimate your additional insurance needs.
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This article was authored by Joelle Spear and Jeffrey Briskin. Joelle is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. She offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. She can be reached at 508.598.1082 or jspear@canbyfinancial.com. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
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