Tax obligations of a household employer
Do you employ a household worker—perhaps a babysitter or a housekeeper—on a regular basis? Much to your surprise, you may be treated as an “employer” for federal tax purposes. As a result, you could face certain obligations you were not aware of.
These tax responsibilities are often collectively referred to as the “nanny tax” because of several high-profile cases involving wealthy taxpayers with nannies. But the nanny tax is not limited to the upper crust. It can affect people from all walks of life.
Background: The tax law requires you to pay employment taxes if the wages paid to a household employee exceed an annual threshold. The threshold for 2015 is $1,900 (the same as it was in 2014). The nanny tax encompasses the following three taxes:
1. Social Security tax: The 6.2% Old Age Survivor and Disability Insurance (OASDI) portion of Social Security tax is withheld from an employee’s pay and matched by an employer up to the amount of the annual wage base. The wage base for 2015 is $118,500 (up from $117,000 in 2014). Also, an employer must withhold and match the 1.45% hospital insurance (HI) portion of the tax.
For example, say you pay a housekeeper $200 a week with two weeks off for a total of $10,000. The Social Security tax both you and the housekeeper owe is $765 ($620 OASDI tax + $145 HI tax).
2. Federal unemployment tax: An employer must pay a 6.0% tax on the first $7,000 in wages, but this amount is normally reduced by a 5.4% credit. Thus, the effective net tax is 0.6% if all required state unemployment and disability taxes have been paid.
3. State unemployment and disability taxes: Typically, an employer is also responsible for its share of these state taxes and for withholding the proper amount on behalf of an employee. If these taxes are not withheld, the employer must pay them.
A worker is your “employee” only if you control the conditions. For instance, if you pay an agency directly, the agency is treated as the employer of the worker and is responsible for the taxes. Alternatively, if the worker controls how and when the work is performed and works for several households, he or she may be considered to be a self-employed individual. This typically occurs when the worker offers services to the general public and provides tools and supplies for the job. Self-employed individuals are responsible for their own employment taxes.
Finally, note that there are several exclusions. The nanny tax is not imposed for amounts paid to your spouse, your child under age 21, your parent (unless certain special conditions apply), or an employee who is under age 18 anytime during the year, unless providing household services is the employee’s principal occupation.