Who wouldn’t welcome some extra help around the house this holiday season? If you are thinking of hiring baby-sitters, cleaning people, yard workers, drivers, health aides/private nurses, or similar domestic workers, there are some things you should know to help minimize tax implications later on.
The most important thing to know is how the Internal Revenue Service (IRS) defines an employee. According to the IRS a “worker is your employee if you can control not only what work is done, but how it is done.” That’s it. It doesn’t matter if the work is full-time or part- time. It doesn’t matter if you hire the worker directly or through an agency or other third party. If you control what they do and how it is done, you have an employee. The exception to this is if the employee is under the age of 18 and if providing household services is not their primary occupation (for instance, a student who babysits or mows lawns on weekends is not an employee for federal tax purposes).
If you do have a household employee, or think you may, the IRS offers guidance in the form of Publication 926, Household Employer’s Tax Guide and Form 1040 Instructions for Household Employment Taxes. You should also be aware of these important dates:
- January 31, 2006: Employees must be given Form W-2 by this date.
- February 28, 2006: Send Copy A of Form W-2 with Form W-3 to the Social Security Administration. (Note: If you are filing electronically this date moves to March 31, 2006)
- April 17, 2006: File Schedule H and pay household employment taxes with your 2005 tax return.
These publications can also help you determine whether you owe federal employment taxes, such as Social Security tax, Medicare tax, federal unemployment tax, and federal income tax withholding, as well as explaining how to calculate, pay and report these taxes for household employees. One other important number you should know is $1,400. The threshold for reporting and paying social security and Medicare taxes on employee wages is $1,400. That means if you did not pay a household employee $1,400 or more during 2005, you do not owe social security or Medicare taxes on that employee. Federal unemployment taxes, however, must be paid if the household employee earned $1,000 or more during any calendar quarter of 2004 and 2005. Annual wages over $7,000 are not subject to federal unemployment taxes.
Besides taxes, the aspect of hiring household employees that trips people up most is whether the employee can work legally in the U.S. The citizens and nationals of the U.S. are automatically eligible for employment, however, they must present proof of employment eligibility and identity when they are hired. In addition, an Employment Eligibility Verification form, Form I-9, must be completed and maintained in the employer’s files for a period of 3 years from the date of hire or 1 year after the date employment is terminated, whichever is later. The Office of Citizenship, created by the Homeland Security Act of 2002, to promote instruction and training on citizenship rights and responsibilities, explains that Form I-9 does not need to be completed for individuals:
- providing domestic services in a private household that are sporadic, irregular, or intermittent;
- providing services for the employer as an independent contractor;
- providing services for the employer, under a contract, subcontract, or exchange entered into after November 6, 1986, where the contractor is, for I-9 purposes, the employee of a third party, such as a construction company or temporary agency.
The Office of Citizenship further reminds all employers that they may not accept photocopies of identification documents, other than a birth certificate, as proof of employment eligibility and to verify that the documents presented appear both authentic and related to the presenter. There is a good faith defense against employer sanctions for knowingly hiring unauthorized aliens, unless it can be proven that the employer had actual knowledge of the unauthorized status of the employee.
A final word on taxes: if you do have a household employee you will being paying taxes on this year, you will need an Employer Identification Number (EIN). An EIN is not the same as a Social Security Number. Use Form SS-4, Application for Employer Identification Number to request an EIN. The IRS accepts EIN applications online at www.irs.gov/business/small.