Understanding Household Employees
A household employee is someone who is paid to perform services within an employer’s home. Employers direct what work a household employee undertakes and how it should be executed. Common examples include babysitters, nannies, and gardeners, but it’s crucial to differentiate these workers from independent contractors like repairmen, carpenters, and plumbers, who operate their own businesses.
The IRS does not mandate that employers withhold federal income tax from a household employee’s wages. However, if the employee requests it, the employer can choose to do so.
Distinguishing Household Employees from Independent Contractors
The Internal Revenue Service distinguishes household employees from independent contractors by determining who controls the work done and how it is performed. If the employer controls both, the worker is classified as a household employee. On the other hand, independent contractors provide their services independently, offering their tools and determining how their work is completed.
Key Points to Remember:
- Household employees perform all services at their employer’s residence.
- If the employer controls the work and its specifics, the worker is a household employee. If the worker controls their work, they are an independent contractor.
- Household employees can include nannies, babysitters, housekeepers, and gardeners.
- All new hires from 2020 onwards must complete the revamped W-4 form.
Real-Life Examples of Household Employees
A household employee remains classified as such regardless of whether they work full-time or part-time, or if an employment agency placed them. They can be paid hourly, daily, weekly, or per job.
Common examples include:
- Babysitters
- Caretakers
- Cleaning staff
- Domestic workers
- Drivers
- Health aides
- Housekeepers and maids
- Nannies
- Private nurses
- Yard workers
Tax Considerations: Navigating “Nanny Tax” Implications
As of 2021, if you employ household workers earning more than $2,300 in cash wages annually, you’re responsible for paying Social Security, Medicare, and Federal Unemployment taxes on their wages. State taxes may also apply.
This is often referred to as the
Related Terms: household workers, independent contractors, caregivers, nannies, tax withholding.
References
Get ready to put your knowledge to the test with this intriguing quiz!
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## What defines a household employee?
- [x] An individual who works within someone's home performing domestic services
- [ ] An individual who manages rental properties
- [ ] An individual who is a personal financial advisor
- [ ] An individual who sells real estate
## Which of the following is an example of a household employee?
- [ ] A financial planner
- [x] A nanny
- [ ] A real estate agent
- [ ] A stockbroker
## What must employers do if they pay a household employee more than a certain threshold amount in cash wages?
- [ ] Provide them with healthcare benefits
- [ ] Offer stock options
- [x] Withhold and pay Social Security and Medicare taxes
- [ ] Enroll them in a pension plan
## Which form do employers use to report wages and taxes for household employees?
- [ ] Form 1040
- [ ] Form W-4
- [x] Schedule H (Form 1040)
- [ ] Form 1099-MISC
## What is a key tax responsibility of employers of household employees?
- [ ] Filing quarterly income tax returns
- [x] Paying federal unemployment tax
- [ ] Filing family medical leave documents
- [ ] Reporting work performance reviews to the IRS
## What should be provided to a household employee at the end of the year for tax purposes?
- [ ] A revised employment contract
- [ ] A letter of recommendation
- [x] Form W-2
- [ ] A detailed list of annual services provided
## If a household employee is injured on the job, what is the employer typically required to provide?
- [x] Workers' compensation coverage
- [ ] A retirement plan
- [ ] A comprehensive employment review
- [ ] A public apology
## What differentiates a household employee from an independent contractor working in a home?
- [x] The employer controls what work is done and how it is done
- [ ] The employee sets their own wages
- [ ] The employee decides their work hours without any input
- [ ] The employee owns their tools and equipment
## In addition to Social Security and Medicare, what other tax might household employers be liable for?
- [ ] Corporate income tax
- [x] Federal unemployment tax
- [ ] State sales tax
- [ ] Corporate dividend tax
## When hiring a household employee, what document is crucial for verifying their eligibility to work in the U.S.?
- [ ] A mortgage statement
- [ ] A housing contract
- [ ] A drivers' license
- [x] Form I-9
