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Tax Planning 2020: Figuring Out if Your Client Has Household Employees

There are plenty of tax, wage and compliance nuances to household employment that can trip up even the savviest of accountants. And it all starts with figuring out who should be considered a household employee. Getting this right is important as you calculate your client’s household employment tax obligation for their personal tax returns.

Feb 24th 2020
Founder and CEO GTM Payroll Services
Blogger
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Nanny playing with kids
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Nanny playing with kids

There are plenty of tax, wage and compliance nuances to household employment that can trip up even the savviest of accountants. And it all starts with figuring out who should be considered a household employee. Getting this right is important as you calculate your client’s household employment tax obligation for their personal tax returns.

Let’s look at five key considerations in determining whether someone working in your client’s home is considered a household employee.

1. Job Role

If a family employs an individual to perform duties in or around their home and has the right to control when, where, how or by whom the work should be performed, then that worker is a household employee.

Typical household employees include nannies, housekeepers, estate managers, chefs, personal assistants and chauffeurs. Privately hired senior caregivers and companions (hired independently or through a placement agency) can also be considered household workers.

Summer nannies and after-school caregivers are examples of seasonal or temporary workers that could fall into the category of household employment.

2. Nanny Tax Thresholds

If the individual working in your client’s home earns $2,200 or more in 2020 (or made $2,100 or more in 2019), then your client has nanny tax obligations. This is the employment coverage threshold that’s set by the IRS every year. They’ll pay 7.65 percent of the worker’s cash wages for Social Security and Medicare (FICA) and withhold the same amount from their employee’s pay.

If the employee is paid $1,000 or more in any calendar quarter, then your client owes federal unemployment taxes of six percent on the first $7,000 in wages. They may also owe state unemployment taxes.

3. Family Relationship to Employer

Now, what happens when your client hires a family member for the job?

If the employee is your client is a

  • Spouse
  • Child under the age of 21 or
  • Parent

then you don’t have to worry about withholding or paying nanny taxes, regardless of how much they made in cash wages.

Other relatives, like aunts, uncles, cousins, nieces and nephews, would be subject to household employment taxes provided they are over the age of 18.

4. Age of Employee

Any employee under the age of 18 at any time during the year they’re working for your client is not considered a household employee for tax withholding purposes, regardless of their cash wages.

However, if that employee makes $1,000 in cash wages in any calendar quarter, then your client is subject to federal unemployment taxes and possibly state unemployment taxes.

5. Employee or Independent Contractor

A family may think they can classify their household worker as an independent contractor and provide them with a 1099 at the end of the year. An independent contractor pays both the employer and employee FICA tax obligation – 15.3 percent of cash wages. The family avoids unemployment taxes as well.

However, the IRS almost always classifies household workers as employees and not independent contractors.

Here’s why: It comes down to a matter of control. A family sets their employee’s schedule and tells their employee how to do their job, and the employee uses the family’s tools and equipment.

For example, a family with a nanny will dictate when they need the person to work. It could be the same hours every day, every week. Or, they could vary. Either way, the family tells the nanny when they need to be at the home to care for their children.

The family will also set parameters around how they want their children cared for, such as nap times, feedings, screen time and disciplinary measures.

Finally, the nanny will use the family’s stroller for walks and utilize their kitchen to prepare food. Bottom line, a nanny is not going to determine when they’ll work, and they’re not going to make up a baby’s schedule for sleeping and eating. The family is in control of the employment, and the nanny is their employee.

If there’s any doubt, you can file Form SS-8 with the IRS and have the agency decide on the worker’s status. Employee misclassification is considered felony tax evasion.

So, when you’re completing client tax returns, you’ll want to get nanny taxes right. It’s important to understand who is or isn’t considered a household employee. Failing to pay the proper taxes can lead to fines, penalties and payment of all taxes owed.

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